Karachi, May 26, 2024 – The Overseas Investors Chamber of Commerce and Industry (OICCI) has recommended the abolition of the windfall profit tax on banks in its proposals for the Budget 2024-25.
The windfall profit tax was introduced through the Finance Act, 2023, and applies to any substantial profit made by banks in the three tax years preceding the tax year 2023 and onwards, with an additional tax of up to 50%.
The OICCI argued that this tax imposes an unnecessary burden on banks, which are already subjected to high tax rates. Currently, banks face a corporate tax rate of 39% and a super tax rate of 10%, bringing the effective tax rate (ETR) to 49%. Adding a windfall profit tax on top of these existing taxes would make the ETR unsustainable and excessively burdensome.
In addition to the recommendation to abolish the windfall profit tax, the OICCI addressed the enhanced rate of tax on income from investment in Federal Government Securities. The chamber suggested that the incremental tax applied under Rule 6C of the seventh schedule of the Income Tax Ordinance (ITO) 2001 should be permanently removed. This rule imposes an increased tax rate on banks’ income from such investments.
Alternatively, the OICCI proposed adding a clarification after Sub-Rule 6A of Rule 6C to specify that the Gross Advances to Deposit Ratio refers to the gross advances and deposits as they appear in the financial statements of banking companies. This clarification would help eliminate any ambiguity in the application of the rule.
The OICCI also recommended restoring the original provisions of the Seventh Schedule, where provisions for bad debts as per the Prudential Regulations of the State Bank of Pakistan (SBP), supported by an auditor’s certificate, were allowable as a tax deduction for banks. This change would provide a more consistent and predictable tax environment for banks.
Furthermore, with the introduction of IFRS 9, which becomes effective for banks from January 1, 2024, the OICCI proposed that loan losses recognized in the profit and loss accounts should be allowed as admissible expenses for tax purposes. This alignment with international financial reporting standards would ensure that banks’ financial statements accurately reflect their financial health and tax obligations.
The OICCI’s recommendations aim to create a more equitable and sustainable tax framework for banks in Pakistan. By addressing these tax issues, the chamber believes that the banking sector can continue to contribute significantly to the national economy without facing undue financial strain from excessive taxation. These changes would not only benefit the banking industry but also enhance overall economic stability and growth in Pakistan.
