No significant tax measures announced for the banking sector

KARACHI: Pakistan’s federal budget has announced no significant tax measures for the banking sector, experts say.

“No big measures announced, other than the higher tax rate on profit on debt for non-filers,” says Mustafa Mustansir, the head of research at Taurus Securities.

Pakistan has set a challenging tax revenue target of Rs12.9 trillion, which is around 40 per cent higher than the estimated collection of Rs9.25 trillion in FY2024. This target represents an average growth of 20 per cent over the last five years. The government aims to collect Rs3.6 trillion from non-tax revenue. The total budget expenditure is estimated at Rs18.8 trillion, with Rs9.7 trillion allocated for markup expenses.

“The government has kept silent on ADR [advance-to-deposit ratio] tax which means it shall apply for FY25 now and the positive thing is no new tax was imposed on the sector,” according to Mustansir.

“Advance tax rate on profit on debt for non-filers is being enhanced from 30 to 35 per cent to increase the cost of non-compliance,” he adds.

According to the Finance Bill 2024, commercial banks will not be able to classify ‘substandard’ or ‘doubtful’ bad debts nor can they treat provisions for advances, off-balance sheet items, or other financial assets classified in stages 1, II, or III as expenses under any accounting standard, including IFRS9. According to some analysts, this will hurt the banking sector. Some believe it will be natural for banks.

Only ‘bad debts’ classified as ‘loss’ pertaining to non-performing assets under the prudential regulations issued by the State Bank of Pakistan| shall be allowed as expenses.

Analysts expected the government would consider raising the withholding tax on cash withdrawals above Rs50,000 for non-filers from 0.6 per cent to 0.9 per cent in the upcoming budget in order to increase revenue.

In addition, it was anticipated that in the fiscal year 2025, banks would face higher taxes related to the lower advance-to-deposit ratio (ADR).

The effective tax rate for the banking industry is now 49 per cent and includes both corporate and super taxes. In 2024, banks will be subject to an additional tax of 10 per cent if the ADR is between 40 and 50 per cent; 16 per cent if the ADR is less than 40 per cent; and no additional tax if the ADR is more than 50 per cent. This additional tax will apply to income from federal government securities.

The budget arrived two days after the State Bank of Pakistan reduced its key interest rate for the first time in four years, following a significant drop in inflation. The SBP lowered the policy rate by 150 basis points to 20.5 per cent on Monday.

Analysts and markets anticipate that monetary easing will continue in the next fiscal year, with an expected interest rate reduction of 600-700 basis points by June 2025. Analysts also predict that the rate cut will impact banks’ returns on current account deposits, resulting in a narrowing of their spreads.