Chief Executive Officer, Pakistan Banks Association, Tawfiq Hussain, said the banking sector is playing a vital role in the country’s economic development 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 Agent 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 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, PBA members’ total contribution to the federal treasury 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 the tax year 2014 and to 29% for the 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. Still, it is also very high 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 a 29% tax rate.
PBA believes that to provide a level playing field, banks should also be taxed at a uniform tax rate of 29%, as applied 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 2015 at the rate of 4% for banks and 3% for entities other than banking companies that 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 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 has 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 compared to other sectors. He said that what is often not considered 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 by the FBR and the government through the Finance Bill 2022. If this were true, it would be grossly inequitable, as it would further widen the gap of taxes on the banking sector compared to other sectors and make the discriminatory tax treatment for banks even more pronounced. It would also send a negative signal to all banks’ stakeholders, especially their investors.
He said the PBA, therefore, strongly recommends that the FBR and the government not impose any additional/new tax or levy on the already overburdened banking sector, which is fully documented and pays the taxes imposed on