Govt eyes additional Rs70bn in taxes from banks under new formula

ISLAMABAD: The federal cabinet Friday approved the promulgation of an income tax ordinance for bringing changes in the Advance Deposit Ratio (ADR) of banks expecting the flow of an additional Rs70-75 billion into the state kitty by the end of December.

Under the proposed agreement struck between Ishaq Dar-led committee and the banking sector, both sides agreed that the calculation of bank profits on account of advance deposit ratio will be replaced with ratios to fixed maximum slab.

The banking sector rate has been jacked up from 39 percent to 44 percent under the agreed formula. Now the banking sector is supposed to pay a tax amount of Rs70-75 billion into the national exchequer.

“The federal cabinet has approved the promulgation of an ordinance on income tax but the president of Pakistan has not yet signed it. We are waiting for the president to promulgate this ordinance,” a top official in the FBR told The News on Friday.

The ADR in terms of Income Tax Ordinance, 2001, through Finance Act 2022, higher tax rate on banks on the issue of Advance to Deposit Ratio (ADR Ratio) of Banks was introduced for tax year 2022 (Jan 2021 — Dec 2021) and onwards through insertion of sub-rule (6A) in rule 6C on the rates of:

a) 55% tax on the income attributable to investment in Federal Government Securities if ADR Ratio is up to 40%

b) 49% tax on the income attributable to investment in Federal Government Securities if ADR Ratio is between 40 & 50%

c) Normal rates if ADR Ratio exceeds 50%.

Now instead of these different slabs, the ADR was settled from the corporate sector rate of 39 percent to 44 percent on the profits derived through advances into government securities by the banking sector.

Earlier, Prime Minister Shehbaz Sharif had constituted a high-powered committee under Deputy Prime Minister Ishaq Dar to explore possibilities to bring profits of banks accrued from investment in government securities.

The committee comprised deputy prime minister, minister for finance & revenue, law minister, minister of state for finance & revenue, attorney general for Pakistan, finance secretary, chairman FBR, governor State Bank of Pakistan and Ms Asma Hamid.

The Terms of Reference (ToRs) of the committee included to review the existing legal framework of fiscal measures related to Advance to Deposit Ratio of Banking Sector, to deliberate on alternative fiscal schemes to tax bank profits accrued from investment in government securities, and to engage with the banking sector developing a consensus on way forward, if possible.