Revised taxation for banks applicable January 01, 2021

Revised taxation for banks applicable January 01, 2021

ISLAMABAD: The Federal Board of Revenue (FBR) has revised taxation for banks from tax year 2022 (starting from January 01, 2021, to December 31, 2021) onwards.

An important amendment has been introduced through Tax Laws (Third Amendment) Ordinance, 2021, which was promulgated through a presidential ordinance.

Through Finance Act, 2021, a sub-rule (6A) in rule 6C of Income Tax Ordinance, 2001 was introduced, which was applicable for banks from the tax year 2022 (January 01, 2021 to December 31, 2021).

The text of sub-rule 6A was:

(6A) For tax year 2022 onwards, the taxable income attributable to investment in the Federal Government securities shall be taxed at the rate of—

(i) 40 per cent instead of rate provided in Division II of Part I of the First schedule if the assets to deposit ratio as on last day of the tax year is upto 40 per cent;

(ii) 37.5 per cent instead of rate provided in Division II of Part I of the First schedule if the assets to deposit ratio as on last day of the tax year exceeds 40 per cent but does not exceed 50 per cent; and

(iii) at the rates provided in Division II of Part I of the First schedule if assets to deposit ratio as on last day of the tax year exceeds 50 per cent.

However, through Tax Laws (Third Amendment) Ordinance, 2021 this was amended and for the words ‘assets’, wherever occurring, the words ‘gross advances’ shall be substituted.

Tax experts believe that the amendment would have a negative impact on banks with ADR of less than 50 per cent as they have to pay additional tax on their entire income arising from investment in government securities rather than additional income as was the case previously.

They said that the banks with low ADR took the impact of the same in June 2021 financial results and as a result effective tax rate of banking sector increased from 38 per cent in 2Q2020 to 40 per cent in 2Q2021. This is likely to have an earnings impact of around 5-10 per cent for the sector.

The idea of this increased taxation was to encourage banks to increase their lending activity but this remains a big question mark of how effective this policy measure will be.

The latest banking sector data (week ending September 3, 2021) show that ADR of the sector is at 47 per cent, below the threshold of 50 per cent for additional taxation. This compares to ADR of 48 per cent in Sep-2020 and 45 per cent in Jun-2021.   

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