Pakistan promulgates ordinance to revise advance-to-deposit ratio tax on banks

Pakistan promulgated an ordinance on Monday night to revise the advance-to-deposit ratio (ADR) tax structure imposed on banks, official sources informed Nukta.

The Income Tax (Amendment) Ordinance 2024, which was promulgated by President Asif Ali Zardari, would lead to an additional amount of around PKR 70 billion in taxes collected from banks.

Officials informed Nukta that the government had removed the additional tax imposed on banks that failed to meet the minimum advance-to-deposit ratio threshold and instead, increased the tax rate for banks for tax year 2025

According to the ordinance, the tax rate has been raised from 39% to 44% for tax year 2025, 43% for 2026, and 42% from tax year 2027 onwards.

The move comes as the banking sector's ADR improved to 49.7% as of December 6, up from 47.8% in November, prompting the government to change the taxation structure to generate more revenue.

Understanding the ADR tax issue

The ADR measures the percentage of a bank's deposits allocated as loans. Pakistan's businesses have long faced challenges in accessing financing, and the government raised the ADR requirement to 50% in 2022 to address this issue.

Under the government's rules, banks with ADR in the range of 40-50% would have had to pay an additional tax of 10%. If the ADR was below 40%, they would have had to pay an additional 16% tax on income from government securities.

However, within a month of the announcement that the government would not give them exempt them from the ADR tax, banks introduced several plans to promote lending amongst individuals and the corporate sector.

Since the banks were now likely to meet the ADR requirement, the government started looking at alternate ways to tax income from investments in government securities.

Last month, Prime Minister Shehbaz Sharif formed a committee to resolve ADR-related issues. Chaired by Deputy Prime Minister Ishaq Dar, the committee was tasked with reviewing the legal framework surrounding the ADR tax and proposing alternative fiscal measures to ensure compliance without stifling lending activity.