PBA strongly recommends FBR not to impose any additional tax on the banking sector

Chief Executive Officer, Pakistan Banks Association, Tawfiq Hussain, said the banking sector is playing a vital role in the economic development of the country and is supporting major initiatives of the government, the Federal Board of Revenue (FBR) and the State Bank of Pakistan (SBP). It also plays a pivotal role, as Executing Agents, in supporting the government and SBP’s interventions to respond to challenges like the COVID 19 Pandemic. It is also one of the largest contributors to the national exchequer and should therefore be treated equitably.

He said that for the year ended Dec 31, 2021, the banking sector paid total taxes of about Rs.178 bn to the national exchequer. The sector collected and paid to the FBR, withholding tax of over Rs.162 bn. In 2021, the total contribution to the national exchequer from the members of PBA was over Rs.340 bn.

Regarding business income of the corporate sector, the PBA CEO said the government had taken a very positive step by progressively reducing its income tax rates, starting from 35% to 34% for tax year 2014 and to 29% for tax year 2019 onwards.

Unfortunately, he said, no such reduction has been provided for the banking sector.

According to him, the tax rate of 35% for banks is not only one of the highest in the region, but is also very high when compared to other business sectors in Pakistan, including the financial service sector, like mutual funds, DFIs, leasing companies, insurance companies, etc. since they are taxable at 29% tax rate.

PBA believes that in order to provide a level playing field, banks should also be taxed at a uniform tax rate of 29%, as was applicable to other sectors of the economy.

The PBA CEO has also brought into focus the payment of Super Tax by banks. He said Super Tax was introduced in tax year 2015 at the rate of 4% for banks and 3% for entities other than banking companies which had an income of Rs 500 million or more. It was only a one-time levy to cater to specific needs “of rehabilitation of temporarily displaced persons”. However, it was extended each year for both banking and non-banking sectors. It was then abolished for the non-banking sector in tax year 2020, but was made a permanent feature for the banking sector with the promulgation of the Tax Laws (Amendment) Ordinance 2021.

In the banking sector’s view, Super Tax on it is discriminatory, as not only was the rate initially 1% higher for the banking sector as compared to the non-banking sectors, but now, with the recent amendment, only the banking sector had been singled out for levy of Super Tax. He said this means all other sectors of the economy, including financial institutions and insurance companies, have been exempted from Super Tax.

PBA strongly believes that since Super Tax at 4% for banks is discriminatory, it should be abolished. The PBA CEO further said the banking sector’s absolute post-tax profit of Rs 264bn for the financial year ended Dec 31, 2021, appears to be large, in comparison to other sectors. He said that what is often not taken into consideration is the total equity of banks of Rs 1.94 trn, as of Dec 31, 2021, was also much larger than that of other sectors as this sector requires a very large capital base to meet the regulatory requirements. Also, the return on equity of the banking sector at 14%, as of Dec 31, 2021, was healthy, but in no way excessive compared to other sectors. He added that the return on equity for the banking sector is actually on a declining trend.

PBA understands that levying additional taxes on the banking sector may presently be under consideration of the FBR and the government through the Finance Bill 2022. If this was true, it would be grossly inequitable, as it would further widen the gap of taxes on the banking sector as compared to other sectors and make the discriminatory tax treatment for banks even more pronounced. It would also send a negative signal to all stakeholders of banks, especially their investors.

He said the PBA, therefore, strongly recommends that the FBR and the government not to impose any additional/new tax or levy on the already overburdened banking sector, which is fully documented and pays the taxes imposed on it.

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