Pakistan increases standard tax on banks to 44%; hints at future reductions

Pakistan government has announced a 5% increase in the tax on banks, and indicated that the overall tax rate will be reduced in the coming years.

Effective from the year ending December 31, 2024, tax on the banking sector is increased to 44%, up from the previous rate of 39%.

According to a document obtained by nukta, banks will also be required to pay a super tax of 10% in addition to the standard tax rate.

However, the tax rate is set to decrease by 100 basis points each year, reaching 43% in 2026 and 42% in 2027.

Moreover, the tax on not meeting the Advance Deposit Ratio (ADR) limit will be abolished.

Earlier, banks faced an additional tax rate of 10% and 16% on income earned from government securities if their ADR fell below 50% and 40%, respectively.

As of the end of November, the banks' ADR stood at approximately 49.7%.

An analyst noted that since banks have met the ADR limit, the government has found another way to increase revenue collection, which has been falling short by significant margins in the first six months of the current fiscal year.

The government aims to collect PKR 70 billion from the newly imposed tax.

A report from Topline Securities indicated that the new tax measures are expected to erode the banking sector's earnings by an estimated 10-12%.

Among the listed banks, Meezan Bank (MEBL) has already accounted for a tax impact of PKR 6 billion in the first nine months of 2024, suggesting a lower impact on its fourth-quarter accounts.

Despite this adjustment, the development is largely viewed as negative for the banking sector.

Market analysts have observed that rumors of increased taxes on banks had been circulating recently, and it appears the market has partially adjusted to the anticipated impact.

While the abolition of the low ADR tax removes one layer of taxation, the higher standard tax rate adds pressure on the sector, signaling challenging times ahead for banks.

Mohammed Sohail, CEO of Topline Securities, stated that at the time of the imposition of the new ADR-related tax, many banks had an ADR below 40%.

In such cases, the effective tax rate for banks would have been 59%, assuming 65% of income from investments.

However, following the current development, which also removed uncertainty, the effective tax rate for banks is now 54%, with a planned reduction of 100 basis points each year over the next two years.