Govt imposes 10pc super tax, banks lash back

KARACHI: Cash-strapped government on Friday imposed 10 percent super tax on large corporates including banks at a time when bankers were busy lobbying for lowering the already proposed tax hikes as unfair and a threat to lenders' profitability.

Pakistan Banks’ Association (PBA) has been requesting the government to reconsider proposals to raise tax rates on the banking sector unveiled in budget 2022-23, explaining that such levies on the most taxed industry could have a considerable negative impact, a source familiar to this matter told The News.

However, despite revising the planned tax rates, the government was trying to put more burdens on the banks before the approval of the next fiscal year’s budget. A new tax on 13 sectors was going to be imposed where banks were expected to see the major brunt. Their profits would likely face a decline, and earnings of some banks might fall by 13-14 percent.

“There is a lack of fairness about the taxes being paid by banks. The current corporate tax rate of 35 percent for banks is one of the highest in the region and also very high when compared to other sectors in Pakistan, and the government has proposed to take it to 45 percent in the next fiscal year,” the source added.

“Banks understand the government wants fiscal consolidation to mitigate its growing debt. It needs to increase its revenues but it is difficult to comprehend the sense of taxing the already overtaxed,” the source said. “The banking sector is fully documented, contributing over Rs340 billion to the exchequer in the form of payment of taxes in 2021.”

The overall tax burden on banks is set to rise as the government seeks to rein in the budget deficit. The approval of the IMF for the revival of the bailout package is the urgent priority of the government.

With the announcement of the latest super tax and the measures unveiled in the budget presented on June 10, if approved by the National Assembly, the total tax rate for the banks for the tax year 2023 would be 55 percent. This includes 45 percent corporate tax and 10 percent super tax, according to analysts.

The government has replaced the 4 percent poverty alleviation tax with a 10 percent super tax.

The government has also recommended a significant increase in the additional tax rate on the interest income from investing in government securities as banks have come under strict scrutiny over higher yields on such investments. Banks with low advance-to-deposit ratio (ADR) would be subject to the tax also.

“We are not sure about the retrospective application of the 10 percent super tax. However, the understanding was that since poverty tax was applicable from the tax year 2022 onwards, it will tax the calendar year 2021 earnings also for banks along with 2022,” said Mustafa Mustansir, the head of research at Taurus Securities.

“Hence, it is very likely that super tax on banks applies similarly. But we are awaiting more clarity on it. Because the super tax was originally abolished for banks in the earlier proposed Finance Bill 2022. Also, it is being said that it is for one year only, but experience tells that super-taxes are often continued for more than one period or tax year,” Mustansir added.

Advocates of the increase in tax on interest income of banks from investing in the government papers said it would help reduce the unprecedented rise in the cut-off yields on treasury bills and Pakistan Investment Bonds and other borrowing costs. Hence this would ultimately slow down the interest payments of the government on domestic debt.

Higher borrowing from banks was crowding out the private sector. Pakistan’s total debt stood at Rs43.7 trillion till the end of April, marking a year-on-year jump of 17.9 percent. Domestic debt rose 14.1 percent to Rs28.9 trillion.

The government allocated 42 percent of total expenditure for debt servicing under domestic borrowing during FY2023 which comes out to be around Rs4 trillion.

Dr Muhammad Yaqub, former governor of the central bank said banks were supposed to be financial intermediaries between savers (surplus units) and spenders, mainly private sector investors (deficit units), and make a reasonable profit by applying a lending rate that was based on their deposit rates. In Pakistan, banks have become intermediaries between the central bank and the government by using the discount window of the central bank. They make huge profits without performing their conventional function of financial intermediation. “The best course of action is for the SBP to set a limit on banks to hold government paper as a percentage of their assets. It will compel banks to engage in their traditional role to earn profits,” Yaqub said.

He said as the SBP was not performing its regulatory function, leading to windfall profits for banks, “there is an economic justification for the government to collect a part of their windfall profits through taxation”. However, the government and the SBP should be aware that banks make these huge profits because the government has an unlimited appetite for borrowing from commercial banks.