New taxes for the banking sector under the federal budget 2022-23 are likely to significantly impact profitability by 15-20 percent, according to Topline Securities.
These changes include an increase in the corporate tax rate for banks, an additional two percent tax on account of imposed poverty alleviation, and an increase in the tax rate on interest income on government securities.
As per the Finance Bill, the corporate tax rate has been increased from 35 percent to 45 percent from the Tax Year 2023 and onwards (CY2022 and onward) and the super-tax of four percent has been abolished. Hence, effectively, the tax rate has been increased by six percent from 39 percent to 45 percent, and this will impact earnings in 2022 and onward.
An additional two percent poverty alleviation tax has been imposed on the banking sector (banks with earnings of Rs. 300 million and above) from the tax year 2022 onward (CY2021 onward) as per 7CA of the Seventh Schedule of the Income Tax Ordinance.
Furthermore, the tax rate on the interest income from government securities with banks having an Advance-to-Deposit ratio (ADR) of 50 percent or more has been increased from 35 percent to 45 percent. For banks with ADR of 40 to 50 percent, the rate has been increased to 49 percent from 37.5 percent, and for banks with ADR of less than 40 percent, it has been increased to 55 percent.
The Finance Bill also clarified that this tax will be applicable to the total income attributable to total investment in government securities and not on additional income. The implementation of the said increase in tax rates on certain ADR thresholds will be applied on a retrospective basis from CY2021 and onward (Tax Year 2022 and onward).
It will likely lead to a higher effective tax rate of around 53 percent in 2022 and will settle down to approximately 48 percent in 2023.
Since the SBP Amendment Act 2021, the government has to rely mostly on commercial bank borrowing for financing its fiscal needs, which resulted in rising secondary market yields on government securities. In order to limit banks from taking undue advantage of the given situation, the government has imposed higher taxes on banks and especially on the interest income from government securities.
The above-announced measures will impact the profitability of the sector by around 20 percent for 2022 and 15 percent for 2023. Banks will now gradually try to shed high-cost deposits and will also look to increase exposure in advances to minimize the impact of these measures. They may also contest this huge increase in taxes from the concerned authorities.
After these measures, Topline Banking Universe earnings are expected to grow by 10 percent in 2022 and remain flat in 2023.