Karachi, December 28, 2024 – The federal government has abolished the additional income tax on banks with low Asset-to-Deposit Ratios (ADR). This decision, approved by the federal cabinet, will be implemented through the promulgation of an Income Tax Ordinance.
The proposed additional income tax of 10-15% on banks due to low ADR has been officially eliminated. However, the standard income tax rate for banks has been increased from 39% to 44% for the current tax year ending December 31, 2024. Looking ahead, the tax rate will decrease to 43% for the 2026 tax year, starting January 1, 2025, and further to 42% for 2027 and beyond, as outlined in the draft ordinance.
Additionally, the current super tax of 10% on banks will remain unchanged.
Mohammad Sohail, CEO of Topline Securities Limited, noted that the increase in the tax rate to 44% is expected to generate additional revenue of Rs 60-70 billion for the government. However, he highlighted that this will erode the banking sector’s earnings by an estimated 10-12%.
Among the listed banks, Meezan Bank (MEBL) has already accounted for a tax impact of Rs 6 billion in the first nine months of 2024, which means its fourth-quarter accounts will reflect a lower impact. Despite this adjustment, the development is largely viewed as negative for the banking sector. Banks will now bear an additional tax burden of 5% in the current year, 4% in 2026, and 3% from 2027 onward, irrespective of their ADR levels.
Market analysts have noted that rumors about increased taxes on banks had been circulating in recent days, and it appears the market has partially adjusted to the anticipated impact. While the abolition of the low ADR tax removes one layer of taxation, the higher standard tax rate adds pressure on the sector, signaling challenging times ahead for banks as they navigate these fiscal changes.
The government’s decision reflects its effort to balance revenue generation with addressing the financial sector’s concerns, but the implications for the banking industry’s profitability and growth remain to be fully realized.
