Karachi, January 17, 2025 – In a major development for Pakistan’s banking sector, the Federal Board of Revenue (FBR) has announced a reduction in the corporate tax rate for banks to 43%, down from the previous 44%. This revised tax rate will take effect for the tax year 2026, commencing on January 1, 2025.
The reduction follows the enactment of the Income Tax (Amendment) Ordinance, 2024, which introduced critical changes to the taxation framework governing financial institutions. According to sources within the FBR, this ordinance eliminates the Advance to Deposit Ratio (ADR) Tax, which had been a point of contention between the government and the banking sector. However, the abolishment of the ADR Tax coincides with an increase in overall corporate tax rates, aiming to bolster revenue generation.
KPMG Taseer Hadi & Co., a prominent chartered accountancy firm, highlighted in its tax commentary that the ordinance is primarily intended to address the revenue shortfall faced by the FBR. The corporate tax rate for banks was initially increased from 39% to 44% for the tax year 2025. The adjustments introduced under the new legislation are projected to impact the earnings per share (EPS) of leading banks by approximately 10%. Moreover, deferred tax rates applicable to banks will also see corresponding changes, further influencing financial metrics.
To alleviate concerns raised by the banking sector, the government held extensive discussions with the Banking Association. As a result, the requirement for banks to maintain a specified Advance to Deposit Ratio—previously attracting an additional tax burden of up to 16%—has been rescinded from the tax year 2025 onward.
The revised tax structure introduces a phased reduction in corporate tax rates over subsequent years. For the tax year 2025, the rate for banks has been elevated by 5%, followed by a 4% increase for 2026. From the tax year 2027 onwards, the rate will stabilize with a cumulative increase of 3%.
This recalibration reflects the government’s dual objective of enhancing tax compliance while supporting the banking industry by addressing long-standing issues like the ADR Tax. Analysts suggest that while the higher tax burden will challenge banks in the short term, the removal of the ADR Tax offers a compensatory benefit for sustainable growth.