Karachi, November 11, 2023 – The fiscal landscape of Pakistan has witnessed a remarkable surge, with tax collection from profit on debt skyrocketing by an impressive 103 percent, propelled by the prevailing high-interest rates, according to an official report.
The State Bank of Pakistan (SBP), in its comprehensive annual report on the Economy of Pakistan during Fiscal Year 2022-23, disclosed that the collection of withholding tax from bank interest and securities experienced a substantial upswing, reaching Rs 315 billion in the fiscal year under review, a notable leap from Rs 155 billion in the preceding fiscal year.
The central bank attributed this remarkable increase to the doubling of withholding tax on bank interest and securities in fiscal year 2022-23, primarily fueled by the escalating interest rates and a surge in investments in government securities and other saving instruments. Additionally, the withdrawal of tax benefits on investment in federal government securities played a crucial role in bolstering the overall tax collection, as outlined in the SBP report.
Underlining a significant shift, the SBP highlighted the amendment introduced by the Finance Act 2022. Previously, profit on debt for all entities (excluding banking companies) was taxed at a reduced rate of 15 percent. However, the Finance Act 2022 curtailed the scope of this reduced rate benefit, applying it only to individuals whose profits do not exceed Rs 5 million.
The prevailing benchmark interest rate set by the SBP stands at a substantial 22 percent, reaching its highest level. Investors, enticed by the prospect of attractive returns, have increasingly chosen to deposit their funds in banks, evident in the latest banking data. Bank deposits in Pakistan surged to an unprecedented Rs 26.40 trillion by the end of October 2023, marking a robust 17.80 percent growth compared to the previous year’s Rs 22.41 trillion, underscoring the resilience of the banking industry amid challenging economic conditions.
This surge in bank deposits is reflective of a broader trend, where individuals and businesses prioritize capital preservation over riskier investment strategies. The high cost of borrowing has deterred ventures into new investment avenues, redirecting a significant influx of funds into bank deposits.
Simultaneously, commercial banks, predominantly investing in government securities, have witnessed a substantial surge of 27.28 percent in lending. The total investment of scheduled banks in Pakistan climbed to Rs 23.23 trillion by the end of October 2023, a significant increase from Rs 18.28 trillion.
Compelled by a challenging fiscal situation, the government has turned to substantial borrowing from banks. The SBP report disclosed a 24 percent increase in the outstanding stock of payable against market treasury bills, reaching Rs 9.27 trillion by June 30, 2023, compared to Rs 6.75 trillion a year earlier.
This robust growth in tax collection and banking activities underscores the dynamic interplay of fiscal policies, interest rates, and investment strategies in shaping Pakistan’s economic landscape, making it crucial for stakeholders to adapt to these evolving trends.
