The Federal Board of Revenue (FBR) has been asked by the Pakistan Banks Association (PBA) to reduce the tax rate for banks from 39 percent to 29 percent in its federal budget proposals for the fiscal year 2023–24 (FY24).
The Association noted that the tax rate for banks, which is 39 percent, is not only one of the highest in the area but also excessive when compared to other economic sectors in Pakistan, such as the financial services sector, which is subject to a 29 percent tax.
The government started cutting corporate income tax rates starting in 2014, and by 2019, those rates will be down to 29 percent, the banking industry representative noted. Since the industry’s tax rate was increased to 39 percent in FY23, banks have regrettably not received this type of incentive.
The PBA has suggested that banks be subject to a gradually declining tax rate by initially raising it to 35 percent in the first year, then lowering it by 1 percent each year until it reaches 29 percent.
In addition, the group emphasised the discrepancy in tax rates between bank deposits and investments and lobbied for a 15% tax rate on debt-related income.
According to PBA, the tax rate shouldn’t be a deciding factor when investing cash in banks or buying shares of stock or mutual fund units. This type of approach discourages investors from investing in mutual funds or stocks in favour of bank deposits, which hurts the banking sector and must be fixed, it added.
The Association has also suggested that banks be compensated for using their cash as monthly advance tax using KIBOR-based payouts.
In order to remove uncertainty and prevent such transactions from being treated as activities that would typically require the withholding of income tax, PBA also recommended that regulations be added to highlight transactions that adhere to Shariah law as financing transactions, such as Musharakah, Modaraba, Murabaha, Musawama, Ijarah, Istisna, Salam, and other Shariah-compliant transactions.
The Association reaffirmed that the banking industry was willing to assist FBR in its efforts to broaden the tax base and stated that it was conscious of the budgetary difficulties the government was experiencing.
