Minister of State for Finance, Ali Pervez Malik, a day earlier, made it clear that there are no ongoing discussions or plans for tax exemptions based on the Advance-to-Deposit Ratio (ADR) for banks. Speaking at the Senate Standing Committee on Finance, Malik emphasized that no proposal concerning an ADR-based tax exemption is currently under consideration.
During the committee meeting, the Chairman of the Federal Board of Revenue (FBR), Rashid Mahammad, reinforced the minister’s statement, adding that any changes to the tax policy related to ADR would not occur until next year. He specified that no modifications to the current tax framework would be implemented before December 2024, as the tax authorities are unable to accurately forecast the expected ADR for banks by the year’s end.
The banking sector follows the calendar year as its tax year, meaning the current tax year 2025 will end on December 31, 2024. FBR Chairman Mahammad provided details from the half-yearly financial reports of four major banks, covering the period from January to June 2024. The reported ADR for these banks ranged from 21 percent to 46 percent, highlighting significant variation across the sector.
Mahammad explained that the ADR, which reflects the ratio of loans extended to deposits held, increases when banks lend more to the private sector rather than investing in government securities. However, because of fluctuating lending patterns, the FBR is unable to predict the ADR as of December 31, 2024, with any certainty.
Despite speculation regarding possible tax breaks, Mahammad clarified that no ADR-based tax exemptions currently exist. The tax rates for banking companies are structured around their annual ADR performance. Banks with an ADR of more than 50 percent are subject to a 39 percent tax on their taxable income. However, if the ADR falls between 40 percent and 50 percent, the tax rate rises to 49 percent. Banks with an ADR below 40 percent face a significantly higher tax rate of 55 percent.
This tiered tax system aims to encourage banks to lend more to the private sector, although it remains to be seen whether this strategy will lead to an increase in ADR levels. For now, banks can expect no relief from the existing tax framework.