In a significant policy reversal, Pakistan has abandoned its planned tax on banks’ profits from government debt mere days before implementation, following intense pressure from the banking sector. The proposed levy, designed to stimulate private sector lending, would have required banks to increase their advances-to-deposit ratio (ADR) above 50 per cent by 31 December or face additional taxation of 10 to 15 per cent on investment income.
The government’s Sunday announcement revealed a new strategy, replacing the ADR tax with an increase in overall bank income tax to 44 per cent, representing a 5 percentage point rise. This rate is scheduled to decrease to 43 per cent in 2026 and 42 per cent in 2027. Based on 2024 profitability estimates, the revised tax scheme is projected to generate Rs60bn ($216mn) for the government.
Pakistan Banks’ Association chair Zafar Masud welcomed the changes, noting the banking industry’s willingness to contribute to the public treasury despite the increased taxation burden. The original ADR tax had been criticised as an overly simplistic approach to encourage lending.
The nation’s banking sector has recently enjoyed substantial profits from government debt returns, while Pakistan maintains one of the world’s lowest rates of domestic credit to private sector GDP, according to World Bank data. The central bank’s data showed some positive movement, with private sector credit increasing by Rs1.4tn in October, marking a 15 per cent rise, and the sector’s ADR reaching 49.7 per cent by early December.
The State Bank of Pakistan has also reduced its main policy rate from 22 per cent in June to 13 per cent this month, with additional cuts anticipated as inflation approaches the central bank’s target range of 5 to 7 per cent. The banking sector’s resistance to the original tax proposal included legal challenges and the temporary implementation of deposit fees, which were subsequently withdrawn following central bank intervention.
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