According to Topline Securities, new taxes for the banking industry in the federal budget for 2022–23 are expected to have a substantial impact on profitability by 15-20 percent.
Banks have been subjected to an additional 2% tax for poverty alleviation, as well as an increase in the interest income tax rate on government securities.
According to the Finance Bill, the corporation tax rate will increase from 35% to 45% beginning in Tax Year 2023 (CY2023), and the 4% super-tax will be phased out beginning in that year. Profits will be taxed at 45 percent rather than 39 percent in 2022, thanks to a 6% increase in the effective tax rate.
Section 7CA of the Seventh Schedule of the Income Tax Ordinance says that banks with profits of Rs. 300 million or more will have to pay a two percent tax starting with the tax year 2022 (CY2022).
There has also been a rise from 35% to 45% in the tax rate on the interest income from government assets held by banks with an advance-to-deposit ratio (ADR) of 50% or higher. The rate for banks with an ADR of 40 to 50 percent has climbed to 49 percent from 37.5 percent, and for banks with an ADR of less than 40 percent, it has increased to 55 percent.
To be clear, this tax will be applied to the entire income related to all investments in government securities, not on any additional income. Certain ADR levels will have the aforementioned rise in tax rates implemented retroactively beginning in the calendar year 2021 (The tax year 2022 and onward).
In 2022, the effective tax rate is expected to rise to over 53% and then fall to around 48% in 2023.
To meet its budgetary obligations since the SBP Amendment Act 2021, the government has had to depend on commercial bank borrowing more and more, resulting in higher secondary market rates on government securities. So that banks don’t take advantage of the current situation, the government has raised taxes on banks, especially on the interest they get from government bonds.
The above-mentioned actions are expected to have a 20 percent impact on the sector’s profitability in 2022 and a 15 percent impact in 2023. In order to lessen the impact of these measures, banks will begin to progressively reduce their holdings of high-cost deposits and increase their exposure to loans. It’s also possible that they’ll take this tax hike to court.
Profits for Topline Banking Universe are expected to grow by 10% in 2022 and stay the same in 2023.