Tuesday August 16, 2022

Super tax on banks proposed

Miftah Ismail presented Pakistan’s fiscal year 2022/23 budget on Friday aimed at cutting the deficit and securing the International Monetary Fund bailout money

June 11, 2022
Representational image of a bank.
Representational image of a bank.

KARACHI: The cash-strapped government has proposed raising the tax rate on banks to 45 percent from 39 percent to help increase its revenue collection, as the central bank’s rate hikes help lenders earn huge profits on investing in government papers.

Read full budget speech here. 

Finance Minister Miftah Ismail presented Pakistan’s fiscal year 2022/23 budget on Friday aimed at cutting the deficit and securing the International Monetary Fund bailout money. The minister, in his budget speech, said banks have made significant earnings from investing in risk-free government securities such as treasury bills and Pakistan Investment Bonds on the back of a higher interest rate environment in the country. So, it is proposed that the tax rate on the banking companies be increased from the current 39 percent and the new tax rate includes an additional three percent super tax. This rate is likely to be applied to banks in the next fiscal year if it is approved by the National Assembly.

It is also proposed to increase tax on bank investment in government securities. The effective increase is much higher for some banks based on their advance-to-deposit levels. The Federal Board of Revenue has estimated to fetch Rs53 billion in revenues from taxation on banks.

The advance tax of one percent on foreign transactions through debit/credit cards is also expected to be imposed, with two [percent for non-filers.

These announcements, however, failed to shock or surprise banks, as they were already expecting an increase in super tax in the FY2023 budget. The government wants to impose a super tax/windfall on the banking sector and on companies’ earnings windfall profits.

The PMLN government had imposed a super-tax of four percent on the banking sector and three percent on non-banking companies having profits of Rs500 million and above in 2015.

“Banks are not happy as this tax rate increase is likely to negatively impact banking sector profitability that to be reduced around five percent, but it’s correct banks are taking advantage of the government’s desperate needs of funds for lack of external financing and the most important the government doesn’t borrow from the central bank because of the IMF programme and the amended SBP Act prohibits the central bank’s lender of last resort function,” said a senior banker who declined to be named. So, banks lent money to the government at higher rates, he added.

The State Bank of Pakistan has reportedly tightened the screws on some banks over rising cut-off yields on T-bills and PIBs. The SBP in its last monetary policy statement cleared that policy rate and cut-off rates will be aligned. It also frequently injects funds into the banking system through open market operations, but in the last auction, the government offered higher rates to banks on borrowing via bills and bonds. This is somewhat confusing and raises a need to fix this before higher than necessary Karachi Interbank Offered Rates (KIBOR) levels impact repayment capabilities. The KIBOR stands at 15 percent.

“This is a good thing if some taxes on the banks are going to be hiked. Their core function and bread-and-butter business is financial intermediation—taking deposits and lending. Not heavily invested in the government’s papers,” said another senior banker on a condition of anonymity.

Read full budget speech here. 

Since September 2021, the State Bank of Pakistan has raised policy rates by 675 basis points to 13.75 percent weighed down by higher inflation expectations amid the ongoing commodity super cycle and the elimination of the fuel subsidies.

"There is a need to raise most of the government debts through Shariah-compliant modes like Sukuk to reduce the government borrowing cost,” said an Islamic banker, adding no incentives were announced to promote the Islamic banking in the country in the budget.