KARACHI: The national stock market went bust on Monday mainly because investors reacted to the sharp increase in tax rates on the index heavyweight banking sector.

If parliamentarians pass the proposed changes to the banking sector tax regime in their current form, commercial banks’ net profits will decline by around 20% for 2022 and 15% for 2023, according to Topline Securities. Banks’ accounting period for financial statements is the calendar year.

The federal budget aims to increase taxes on banks under three different headings: a higher corporate income tax, an additional “poverty alleviation” tax, and an increase in taxes on interest income. generated by public securities.

From now on, the banks pay a corporation tax of 35 pc and a super tax of 4 pc, which brings the minimum applicable tax to 39 pc. The proposed budget increases the corporate tax rate to 45% while eliminating the super tax altogether. In addition, it imposes a poverty alleviation tax of 2% on all companies with profits above Rs 300 million.

Therefore, the post-budget minimum taxes applicable to commercial banks amount to 47%.

“The sector has been burdened with heavy taxes across the board on (the) increased earnings in the ongoing monetary tightening environment – ​​in addition to being penalized for higher incomes from federal government securities,” he said. said Amreen Soorani, head of research at JS Global.

The proposed budget aims to increase the tax rate on banks’ interest income they earn by investing in government securities like treasury bills and bullion bonds.

“Following the 2021 law amending the SBP, the government must rely mainly on commercial bank borrowing to finance its budgetary needs, which has led to an increase in secondary market yields on government securities,” he said. said Umair Naseer, associate director of research at Topline Securities.

The proposed hike in the tax rate on interest income earned on government securities is aimed at preventing banks from taking “undue advantage” of Islamabad’s recent ban on direct borrowing from the central bank, it said. -he adds.

The new tax rates on interest income from government securities are different for banks with a variable advances on deposits ratio (ADR), which measures outstanding loans as a percentage of deposits. A lower ADR means the bank is lazy investing more of its deposits in risk-free government papers.

The proposed tax rate with banks with ADRs of 50% or more is 45% compared to the 35% currently in place. The rate is expected to rise from 37.5% to 49% for banks with ADRs between 40% and 50%. It will be 55% for banks with ADRs below 40%.

“Banks will now gradually try to get rid of high cost deposits and will also seek to increase their exposure to advances to minimize the impact of these measures,” Naseer said, adding that banks may also challenge this “huge increase taxes” in court. .

According to the calculation made by AKD Securities, the proposed measures will help the government raise an additional 70-80 billion rupees in taxes per year. The total contribution to the public treasury from members of the Association of Banks of Pakistan in 2021 was more than 340 billion rupees, according to the representative body of commercial lenders.

Posted in Dawn, June 14, 2022