Rs240 Billion Revenue Boost Targets Banking Sector's Tax Evasion

In a decisive move to bolster revenue and address tax evasion within the banking sector, the Pakistani government has amended the Income Tax Ordinance, 2001. This amendment is projected to generate an additional Rs240 billion by eliminating the manipulation of the Advance to Deposit Ratio (ADR) by banks.

Background on ADR Manipulation: Banks have been exploiting ADR calculations to minimize their tax liabilities, leading to significant revenue losses for the government. The ADR tax regime, introduced to encourage banks to increase lending to the private sector, became contentious due to its complexity and the ensuing legal disputes.

Government’s Resolution: To resolve these issues, the government engaged in discussions with banking institutions, which expressed a preference for a straightforward tax structure over the convoluted ADR-based taxation. Consequently, the government proposed rescinding the ADR regime for the tax year 2022 and subsequent years. In its place, a uniform tax rate for banks has been introduced:

Tax Year 2025: 44%
Tax Year 2026: 43%
Tax Year 2027 onwards: 42%

This approach aims to simplify tax compliance and ensure a fair contribution from the banking sector.

Implementation: The draft ‘Income Tax (Amendment) Ordinance, 2024’ received approval from the Cabinet and awaits promulgation by the President of Pakistan under Article 89 of the Constitution. This legislative change is anticipated to not only curb tax evasion but also enhance transparency and accountability within the banking industry.

Implications for the Banking Sector: By abolishing the ADR-based tax regime and introducing a consistent tax rate, the government seeks to eliminate avenues for tax avoidance and strengthen its revenue base. This move underscores the administration’s commitment to fiscal responsibility and equitable taxation.