Pakistani banks impose 'new fee' on depositors to prevent paying additional tax

While a Pakistani court recently issued a stay order barring the government from collecting the Advance-to-Deposit Ratio tax, the country's banks are taking no risks.

To encourage banks to increase lending and boost businesses instead of taking the "safer route" and investing large amounts in government securities, the Pakistani government had decided to impose an additional tax of 10% and 16% if banks' ADR is less than 50% and 40%, respectively.

To save themselves from the potentially paying the additional tax, several banks have published notices via newspapers that account holders have to pay fees of 5% to 6% if their deposits amount to PKR 3- 5 billion in the stipulated time period.

A monthly fee will be applied to all savings and current accounts with a balance of PKR 3-5 billion or above or its equivalent of foreign currency on the last day of the month, according to the notices.

While the fees vary from bank to bank, the main factor behind this levy has been to cover the banks' position against possible taxation. This step would help improve the ADR.

If the court's stay order is vacated, then banks will be left exposed. So, they are doing contingency planning, an analyst told Nukta.

The stay order

Last week, the Islamabad High Court (IHC) temporarily barred the government's tax department from collecting PKR 197 billion tax based on advance-to-deposit ratio from banks.

Chief Justice Judge Babar Sattar, in his order, prevented the Federal Board of Revenue from taking any coercive action against the petitioner (bank) on the basis of any calculation made by the tax department by applying rule 6C(6A) of the 7th Schedule of the Ordinance to its income.

Advocate for the petitioner Dr Farogh Naseem argued that the FBR was seeking to tax the income derived by the petitioner, which is a banking company, from investments made in federal government securities by prescribing the tax rate on the basis of gross advances to deposit ratio.

Which banks face taxation?

The Pakistani government had initially imposed the ADR tax to boost business and lending in 2022. Later, the government suspended the additional tax in budget 2023, but it became effective again in January this year.

The normal income tax rate for banks is 39%. However, if a bank's gross ADR is up to 40%, the government charges 55% income tax on investment in government debt.

For an ADR of 40-50%, the tax rate is 49% and if the ADR exceeds 50%, the normal 39% rate is applied.

Six Pakistani banks were facing an additional 10% tax for failing to meet the central bank's requirement of a 50% ADR. These include Habib Metropolitan Bank, Faysal Bank, Allied Bank, Meezan Bank, Bank of Punjab, and Bank Alfalah as their ADR ranges from 40% to 50%.

On the other hand, Habib Bank, National Bank of Pakistan, Bank Al Habib, Askari Bank, Bankislami Pakistan, MCB Bank, Soneri Bank, Standard Chartered Bank, United Bank, and Bank of Khyber bearing a 16% additional tax due to their ADR being below 40%.