The Finance Bill 2024 introduces several significant changes to the tax laws affecting Pakistan’s banking sector. According to KPMG Taseer Hadi & Co., the banking sector has experienced substantial growth over the past decade, with assets, liabilities, and investments seeing a dramatic increase.
However, this impressive growth is now under threat due to rising interest rates, liquidity challenges, and the lack of governmental incentives. Instead, the government has imposed additional revenue pressures on the sector.
The government’s strategy of focusing on tax collection from profitable sectors, particularly the banking industry, remains unchanged in the Finance Bill 2024. Contrary to expectations, the bill does not offer any tax relief for banks. Instead, it introduces new measures that could impact their financial health.
One of the significant proposals in the Finance Bill 2024 is the exclusion of the impact of implementing IFRS 9 from the calculation of taxable income. The State Bank of Pakistan (SBP) has mandated the application of IFRS 9 to the banking sector starting January 1, 2024. IFRS 9 is an international financial reporting standard that introduces new guidelines for financial instruments, including classification, measurement, and impairment. By excluding the impact of IFRS 9 from taxable income calculations, the government aims to prevent any potential distortions in tax assessments due to this new accounting standard.
Furthermore, the Finance Bill 2024 proposes the inadmissibility of any notional gains and losses recorded in the financial statements that arise from accounting standards, policies, or SBP guidelines, except those determined with reasonable accuracy. Previously, this restriction applied only to International Accounting Standards (IAS) 39 and 40. The new proposal broadens the scope, potentially affecting a wider range of financial adjustments made by banks.
These changes are part of a broader effort by the government to streamline tax collection and ensure that the banking sector contributes its fair share of revenue. However, the lack of tax relief and the introduction of new exclusions could create additional financial burdens for banks, which are already grappling with higher interest rates and liquidity issues.
In summary, the Finance Bill 2024 introduces measures that could pose new challenges for Pakistan’s banking sector. While the sector has enjoyed significant growth in recent years, these new tax laws and accounting regulations could strain its financial stability. Banks will need to navigate these changes carefully to maintain their growth trajectory and continue supporting the broader economy.
