ISLAMABAD:Despite severe economic challenges, the government may abolish up to a 15% additional income tax on the profits that banks make by extending loans to the cash-strapped finance ministry. This move could provide approximately Rs60 billion in benefits to a sector that earned Rs960 billion in profits last year.
Senior government officials and banking industry sources informed The Express Tribune that an understanding has been reached between commercial banks and the federal government to abolish the Advances-to-Deposit rate-based income tax. These legal changes are likely to be made in the Income Tax Ordinance through the Finance Act 2024.
Finance Minister Muhammad Aurangzeb, a former banker, will present the Finance Act in the National Assembly on Friday for approval.
It is unusual for the government to provide around Rs60 billion in relief to one of the wealthiest sectors, particularly when it has imposed taxes on nearly every consumable good, increasing the tax burden on the poor and middle-income groups. About 27 banks made Rs960 billion in net profit in 2023.
While the government plans to abolish the tax on banks, it is not ready to reverse the significant tax increase for the salaried class, which is now expected to contribute about Rs435 billion in income tax next year due to higher rates.
Sources revealed that military authorities also requested the finance minister to review the proposed tax increase for the salaried class and to reconsider the flat 15% capital gains tax on property sales.
Initially, the Federal Board of Revenue (FBR) proposed tightening the additional income tax law for banks to close a loophole that banks used to avoid the tax. The additional income tax was introduced in 2022 to encourage banks to lend to the industry instead of making safe loans to the government.
Banks often avoid the levy by readjusting their lending to the government just before the December 31 tax payment deadline.
The FBR proposed calculating the tax liability based on average annual lending to the government rather than on the last day of the year. This change would have allowed the government to collect an additional Rs60 billion next year.
