Karachi, December 9, 2024 – The government is exploring potential tax schemes for banks in light of the challenges surrounding the Asset to Deposit Ratio (ADR), which may impact tax collection from the financial sector. Prime Minister Shehbaz Sharif has formed a committee to address this pressing issue, with the objective of ensuring optimal tax revenue while maintaining a fair regulatory framework.
The committee, led by Deputy Prime Minister Ishaq Dar, comprises several key figures, including Finance Minister Mohammad Aurangzeb, Law Minister, the Minister of State for Finance and Revenue, the Attorney General of Pakistan, Finance Secretary, Chairman of the Federal Board of Revenue (FBR), Governor of the State Bank of Pakistan, and Ms. Asma Hamid. The committee’s Terms of Reference (ToRs) are outlined as follows:
1. To evaluate the current legal framework governing fiscal measures related to the ADR of the banking sector.
2. To explore alternative fiscal schemes to tax bank profits derived from investments in government securities.
3. To collaborate with the banking sector and FBR to form a consensus on possible solutions.
4. To present recommendations for an optimal solution, ensuring government revenue realization by December 31, 2024.
5. To suggest non-fiscal regulatory measures to increase advances to the private sector.
The committee is tasked with submitting its report within one week, including any necessary legal amendments and regulatory changes to address the ADR challenge.
According to analysts at Topline Securities Limited, banks must meet a 50% Gross ADR target by December 31, 2024, to avoid higher taxes on income from government securities. As of November 15, 2024, the ADR stood at 47%, up from 40% in June 2024. If banks’ ADR falls between 40-50%, they will face an additional 10% tax, whereas an ADR below 40% will result in a 16% tax increase on income from government securities.
In the first nine months of 2024, listed banks reported pre-tax profits of Rs913 billion, with full-year profits expected to reach Rs1,200 billion. Approximately 80% of this profit is derived from government securities. If the ADR stays within the 40-50% range, the government could collect an additional Rs96 billion in taxes, while a drop below 40% could raise the figure to Rs154 billion.
For banks, any increase in taxes due to changes in ADR rules could have negative consequences on profitability. The committee might consider measures such as revising the definition of “advances” and “deposits” or adjusting the formula for taxing low ADR banks. Additionally, a hike in corporate tax or a surcharge on income from government securities could be proposed.
Despite these uncertainties, analysts maintain a Market Weight stance on the banking sector due to its attractive valuations. However, any additional taxes could reduce banks’ profitability by 12-15%. The industry awaits further clarity on the committee’s recommendations.