Govt exempts banks from tax provision for tax year 2024

February 28, 2023 (MLN): The federal government has exempted banking companies from certain tax provisions for the tax year 2024, according to a recent amendment to the Seventh Schedule of the Income Tax Ordinance issued by the Ministry of Finance. 

The amendments include the addition of a new sub-rule to rule 8, which states that the provisions of sub-rule (6A) of rule 6C shall not apply to a banking company for the tax year 2024.

It is important to note that the taxable income arising from the additional income of banking companies earned from additional investment in Federal Government securities was taxable at the rate of 37.5% for the tax years 2020 and 2021, instead of the rates provided in Division II of Part I of First Schedule.

However, this provision was further amended through the Finance Act, 2021, whereby income attributable to investment in the Federal Government securities of banking companies was made taxable on the basis of advances to deposit ratios at graduated tax rates of 40%, 37.5%, and 35%, depending on the ratio.

The Finance Act, 2022 has introduced enhanced rates of tax on the taxable income of banks attributable to investment in Federal Government securities.

For the tax year 2022, the enhanced rates are 55%, 49%, and 35% if the gross advances to deposit ratio was up to 40%, 40-50%, or above 50% respectively. For the tax year 2023 and onwards, the tax rates will be 55%, 49%, and 39% if the gross advances to deposit ratio is up to 40%, 40-50%, or above 50% respectively. These changes have been incorporated by substituting sub-rule (6A) of rule 6C of the Seventh Schedule to the Ordinance.

In addition, the tax rate on income of banking companies has been enhanced to 39% for the tax year 2023 from the current 35%, as per the amendment in Division II of Part I of the First Schedule of the Ordinance. Furthermore, the application of section 4B has been restricted to the tax year 2022 only in the case of banking companies.

These amendments are expected to have a significant impact on the taxation of banking companies and their investments in federal government securities.

The changes in tax rates and restrictions on the application of certain sections of the Ordinance demonstrate the government's efforts to enhance tax revenues and regulate the banking sector in Pakistan.

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