Overseas Chamber calls for abolishing windfall profit tax on
Pakistani banks
The Overseas Investors Chamber of Commerce and Industry (OICCI) has urged the government to abolish the windfall profit tax on banks as part of its proposals for the Budget 2024-25.
Introduced through the Finance Act, 2023, this tax targets substantial profits earned by banks in the three tax years preceding 2023 and onwards, imposing an additional levy of up to 50%.
The OICCI argues that this tax creates an undue burden on banks, which already face significant taxation. Currently, banks are subjected to a corporate tax rate of 39% and a super tax rate of 10%, culminating in an effective tax rate (ETR) of 49%.
The addition of a windfall profit tax further exacerbates this burden, rendering the ETR unsustainable and excessively onerous.
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Besides recommending the removal of the windfall profit tax, the OICCI addressed the higher tax rate on income from investments in Federal Government Securities. The chamber proposed the permanent removal of the incremental tax imposed under Rule 6C of the seventh schedule of the Income Tax Ordinance (ITO) 2001, which increases the tax rate on banks’ income from such investments.
Alternatively, the OICCI suggested clarifying that the Gross Advances to Deposit Ratio, as mentioned in Sub-Rule 6A of Rule 6C, refers to the figures reported in the financial statements of banking companies. This clarification would eliminate any ambiguity in the rule's application.
The OICCI also recommended reinstating the original provisions of the Seventh Schedule, allowing banks to deduct provisions for bad debts as per the Prudential Regulations of the State Bank of Pakistan (SBP), supported by an auditor’s certificate. This change aims to provide a more consistent and predictable tax environment for banks.
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Moreover, with the introduction of IFRS 9, effective for banks from January 1, 2024, the OICCI proposed that loan losses recognized in the profit and loss accounts should be deductible for tax purposes. Aligning with international financial reporting standards would ensure that banks’ financial statements accurately reflect their financial health and tax obligations.
The OICCI’s recommendations strive to establish a more equitable and sustainable tax framework for banks in Pakistan. Addressing these tax issues would enable the banking sector to contribute significantly to the national economy without undue financial strain from excessive taxation. These changes are expected to benefit not only the banking industry but also enhance overall economic stability and growth in Pakistan.
Source: pkrevenue.com