High tax may erode banks’ earnings up to 20%

High tax may erode banks’ earnings up to 20%

KARACHI: The proposed corporate tax rate for banks may erode earnings of the sector by up to 20 per cent on annual basis.

The government presented federal budget on June 10, 2022 and proposed enhancement in tax rates for banking companies.

READ MORE: Pakistan slaps 45% corporate tax on banks

The government announced various taxation measures on the banking sector in the Budget 2022/2023. This includes i) increase in corporate tax to 45 per cent against existing 35 per cent, ii) imposition of poverty alleviation tax of 2 per cent and iii) hike in tax rate in case of adverse Asset to Deposit Ratio (ADR).

New rates would be applicable from Jul 1, 2022 subject to the approval of National Assembly.

READ MORE: Tax rates for business individuals, AOPs during TY2023

Analysts at KTrade expect this development to erode the KTrade’s banking sector earnings by 15 per cent – 20 per cent cumulatively, on an annual basis. Consequently, they have revised down target prices by 15 per cent.

1) Corporate tax enhanced to 45 per cent: The government proposed to increase the taxation to 45 per cent from 2023 onwards in order to meet the direct tax collection target of Rs2.6 trillion for 2022-2023. The analysts expect this to erode banking sector’s earnings by an average of 10.5 per cent on an annual basis.

READ MORE: Pakistan reintroduces advance tax on foreign payments

Type of Tax20222023 and onwards
Corporate Tax35 per cent45 per cent
Super Tax4 per cent0 per cent
Poverty Alleviation Tax2 per cent2 per cent

2) Adverse tax measures on low ADR: Banks would face higher taxation if the ADR threshold falls below 50 per cent. As a reminder, average ADR of banking sector improved to 48.5 per cent in Mar22 as opposed to 45.2 per cent in the same period last year. New rates as per the Finance Bill are as follows:

READ MORE: Exchange companies to withhold tax on payment to MTOs

 Gross Advances to Deposits RatioExisting Rate of TaxProposed Rate of Tax
Upto 40 per cent40.0 per cent55.0 per cent
40 per cent – 50 per cent37.5 per cent49.0 per cent
Exceeding 50 per cent35.0 per cent45.0 per cent

Within Ktrade universe, the analysts highlight BAFL, MEBL and HBL to remain immune because of exceeding the threshold ADR with ADR standing at 60 per cent, 54 per cent, and 50 per cent respectively.

Meanwhile, UBL, MCB and ABL with ADR of 45 per cent would face the negative consequences of higher taxation of 49 per cent.

This would result in further earnings attrition to the tune of 7 per cent for the said companies.

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