Govt Likely to Withdraw 15% Income Tax on Banks’ Profits

The federal government will likely abolish up to 15 percent additional income tax on the banks’ profits made by extending loans to the Finance Division.

This decision follows an understanding between commercial banks and the federal government to abolish the Advances-to-Deposit rate-based income tax through the Finance Act 2024, reported Express Tribune.

While the government plans to abolish the tax on banks, it is not reversing the significant tax increase for the salaried class, which is now expected to contribute about Rs. 435 billion in income tax next year due to higher rates. Military authorities have requested the finance minister to review the proposed tax increase for the salaried class and reconsider the flat 15 percent capital gains tax on property sales.

Under pressure from banks, the government suspended the additional tax for 2023, but it became effective again in January 2024. The normal income tax rate for banks is 39 percent, but depending on their ADR, the rate can go up to 55 percent. Banks have criticized the ADR tax as unjust, arguing that it does not force the government to borrow.

For the next fiscal year, the government plans to borrow Rs. 24 trillion from banks to service existing debt. Following the International Monetary Fund’s ban on direct borrowing from the State Bank of Pakistan, the Ministry of Finance now borrows through the banking sector at a higher interest rate than it would have paid to the central bank.