Plan to hike interest rate on income from bank deposits by 2%

ISLAMABAD: In a bid to secure relief for salaried and other sectors with the consent of IMF, the FBR is considering jacking up tax rate by 2 percent on interest income on deposits lying in commercial banks and saving schemes.

The tax rate is proposed to increase for both filers and non-filers in the upcoming budget for 2025-26.

The IMF has sought details of various tax proposals to bridge the gap coming on the surface in case of provision of relief for salaried class and other sectors whereby the volumes of formal sectors are shrinking, resulting in reduction in collection of tax revenues after imposition of exorbitant rates in the last budget for 2024-25 under the IMF programme.

“It is one of the options to increase tax rates on passive income, as individuals as well as companies place money in commercial banks and saving schemes. The current tax rate on interest income for filers was 15 percent, while for non-filers, it was increased to 35 percent. It is under consideration to jack up tax rates for both filers and non-filers by 2 percent on their passive incomes in the next budget,” one top official said while talking to The News here on Sunday. The official said that the IMF had not yet granted its final nod on this tax proposal.

Dr Muhammad Iqbal, former FBR Member Tax Policy, when contacted, said that the rate at 15 percent on interest income was already quite high because the bank deposits on which income was received from banks also arose from income which was already subjected to tax at the time of its earning.

Moreover, he argues that this rate of 15 percent is only applicable to interest income up to Rs5 million per annum.

For income exceeding Rs5 million, the normal applicable rate on the total income (including interest income) is payable. Interest income earned by companies is also taxable at the normal tax rate for companies (29 percent + surcharge + super tax).

“If this tax rate is hiked, it will make life difficult for those who depend on the interest income from their savings invested in banks and saving schemes. They are already suffering due to falling returns from banks owing to a reduction in policy rates. The commercial banks will also suffer as their deposits may decline,” he added.

He was of the view that the tax rate on dividends was 15 percent, so why the government was considering creating another distortion.

On the other hand, the tobacco and beverages sectors took the stance that their volumes shrank and shifted towards untaxed products. The FBR high-ups sought assurances on increased tax collection if the rates were reduced. The beverage industry proposed to reduce the FED from 20 to 15 percent.

The tobacco sector’s contribution is going to reduce from Rs292 billion in fiscal year 2023-24 to Rs247 billion in the ongoing fiscal year ending on June 30, 2025, indicating a reduction of Rs45 billion in the outgoing fiscal year.