The government doesn’t understand if it should withdraw a 15 percent tax on bank profits from lending to the Finance Ministry or tighten existing laws to fetch Rs. 60 billion more next year.
Authorities are split between relief for banks or more stringent measures to tax banks’ profits on lending to the federal government, reported Express Tribune.
The Federal Board of Revenue (FBR) wants higher tax on bank loans to the government to close a loophole that lets banks avoid the 15 percent tax by adjusting their lending before the December 31 tax deadline. Meanwhile, the State Bank of Pakistan (SBP) and factions in the government itself are in favor of reduced tax burden on banks.
The additional tax was suspended for 2023 but reinstated this year. Banks already pay a 39 percent income tax which increases to 55 percent if their gross advances-to-deposit ratio (ADR) is 40 percent. This income tax rate is 49 percent if ADR hirs 40-50 percent. Beyond 50 percent, the normal 39 percent tax rate applies.
Easing the banks’ tax burden could be problematic, especially when the government is planning to implement an 18 percent sales tax on most goods and services to collect Rs. 12.9 trillion in taxes next fiscal year.
Some have suggested that the tax is aimed to encourage responsible banking, as the federal government cannot borrow from the central bank due to IMF conditions.
This isn’t the first time the government has targeted bank profits in 2024. In April, the federal government decided to charge an additional 10-16 percent tax scheme on banks if their lending to the private sector was below 50 percent of total deposits.
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