Pakistan banks call for reduction in income tax rate to 29%

Pakistan banks call for reduction in income tax rate to 29%

KARACHI: In an effort to create a level playing field, the Pakistan Banks Association (PBA) has proposed a phased reduction in the tax rate for banks from 39 percent to 29 percent, bringing it in line with other sectors of the economy.

The current tax rate for banks is not only one of the highest in the region but also significantly higher compared to other business sectors in Pakistan, including financial service sectors such as mutual funds, DFIs, leasing companies, and insurance companies, which are taxed at a rate of 29 percent.

While the government has gradually reduced income tax rates for the corporate sector, starting from 35 percent in 2014 and reaching 29 percent for tax year 2019 onwards, no such reduction has been provided for the banking sector. In fact, the tax rate for banks was increased to 39 percent in the federal budget for 2022-23, according to the PBA.

To establish fairness, the PBA has proposed a gradual reduction in the tax rate for banks to 29 percent, following a similar trajectory as the corporate sector in the past. The proposal suggests restoring the tax rate at 35 percent in the first year and then reducing it by 1 percent each subsequent year until it reaches 29 percent.

Tawfiq A Hussain, CEO and Secretary General of the PBA, has sent these proposals to Asim Ahmed, Chairman of the Federal Board of Revenue (FBR).

The banking sector plays a vital role in the economic development of the country and supports major initiatives of the government, the FBR, and the State Bank of Pakistan (SBP). In the fiscal year ending December 31, 2022, the banking sector contributed Rs 587 billion to the exchequer, including Rs. 318 billion in taxes and over Rs. 269 billion in withholding taxes collected and paid to the FBR.

Additionally, the PBA has highlighted the disparity in tax rates between bank deposits and investments. Currently, the tax incentives available for individuals investing in shares listed on the stock market and units of mutual funds are more favorable compared to those investing in bank deposits. The PBA recommends a 15 percent tax rate on profits from debt to align with the tax treatment of other investment options.

Furthermore, the PBA has addressed the issue of heavy costs incurred by banks for monthly advance tax payments. The association suggests that banks should be compensated based on the KIBOR (Karachi Interbank Offered Rate) for utilizing their funds in the form of monthly advance tax.

In order to provide clarity and avoid misconceptions, the PBA proposes adding a new clause to the Seventh Schedule that categorizes Shariah-compliant transactions as financing transactions rather than trading activities, ensuring that they are not subjected to withholding income tax.

The PBA also suggests reducing the income tax rate for Microfinance Banks from 29 percent to 20 percent due to their crucial role in supporting and providing micro loans to underprivileged customers and promoting financial inclusion.

While presenting these recommendations, the PBA acknowledges the fiscal challenges faced by the government and emphasizes its commitment to support the FBR in expanding the tax base and generating revenue in a fair and equitable manner.