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Banks Face Rs197 Billion Additional Tax for Lending to Government
A tax advisory firm, Tola Associates, has projected that banks in Pakistan will face an additional income tax burden of Rs197 billion due to excessive lending to the federal government. This tax will be imposed on 27 banks—both domestic and foreign—that have significant operations in the country.
Additional Tax Due to Low Private Sector Lending
The additional tax stems from the advance-to-deposit ratio (ADR), which incentivizes banks to lend to the private sector. If their lending to the private sector falls below a set threshold, they must pay 10-15% additional income tax. According to Tola Associates, the tax is based on audited financial statements from tax year 2024 and projected liabilities for 2025.
If the banks manage to increase their lending to the private sector in the remaining months of 2024, their tax burden could decrease.
Escalating Tax Liabilities for Banks
The total tax impact on banks for tax year 2024 was Rs612 billion, with significant exemptions. However, the projected additional tax liability for 2025 is Rs197 billion, which could increase further depending on profit levels. The additional tax was introduced in 2022 to encourage private-sector lending instead of government debt, which banks often favor for its lower risk.
Lobbying for Tax Exemption
Banks are actively lobbying the government for an exemption from this additional tax, arguing that they are being forced to lend to the government due to restrictions on direct State Bank of Pakistan (SBP) lending to the state. The Pakistan Banks Association is expected to respond soon.
If granted, the tax exemption could significantly reduce government revenue, worsening the fiscal shortfall. However, under Pakistan’s agreement with the International Monetary Fund (IMF), the government is prohibited from offering such tax exemptions.
Regulatory Evasion and Concerns
Former minister Ashfaq Yousaf Tola has raised concerns about banks exploiting loopholes to evade the additional tax, such as using deceptive practices like “round-tripping” funds. He recommended that the SBP should audit banks to prevent such evasion and proposed changes to calculate the ADR based on a yearly average rather than the year-end balance.
With banks pushing for tax relief, this situation will have a significant impact on Pakistan’s revenue collection and banking sector policies.
