The Islamabad High Court (IHC) has temporarily barred the Federal Board of Revenue (FBR) from recovering income tax from Askari Bank Limited based on a tax calculation formula related to the assets-to-deposit ratio (ADR). This ruling, issued on November 11, 2024, effectively halts any enforcement action by the FBR against Askari Bank until the court reviews the matter in full. The court also directed the FBR and the Attorney General for Pakistan to submit a detailed report and comments on the case within two weeks.
At the center of this case is Rule 6C(6A) of the 7th Schedule of the Income Tax Ordinance, 2001, which the petitioner, Askari Bank, argues unfairly targets its income from investments in government securities. According to the bank’s legal counsel, the tax department’s method of taxing income based on the bank’s gross advances-to-deposit ratio oversteps legal boundaries and imposes an unconstitutional burden on the bank’s operations.
Askari Bank’s counsel further asserted that the FBR’s tax approach is effectively attempting to regulate banking practices by altering the tax rate on income earned from investments in Federal Government securities. The bank’s legal team argued that these investments, governed by the prudential regulations of the State Bank of Pakistan (SBP), should not be subject to additional taxation in a way that conflicts with banking policies set forth by the SBP.
The IHC’s interim order states that the FBR cannot take any “coercive action” based on calculations made under the contested rule until the next hearing date. Askari Bank’s counsel emphasized that the FBR’s application of Rule 6C(6A) is retroactive in nature. They noted that investments in government securities made during the financial year had not matured, making it unreasonable to impose an additional tax on income from these securities retroactively.
The bank’s legal counsel also cited a potential conflict between the FBR’s actions and Section 46B(3) of the State Bank of Pakistan Act, 1956. This section assigns the State Bank of Pakistan sole authority over issuing directives to regulated banks, effectively preventing other public bodies, including the FBR, from interfering in the banking sector’s regulatory framework. According to the bank’s argument, by prescribing tax measures based on the ADR, the FBR is effectively encroaching upon SBP’s regulatory jurisdiction.
The petitioner also argued that banking business regulations fall exclusively within the SBP’s domain and that the FBR’s taxation method exceeds its lawful authority, contravening the constitutional provisions under Article 73. This article of the Pakistani Constitution delineates the scope of a Money Bill, which the counsel argues does not encompass the type of regulatory imposition attempted by the FBR in this case.
This legal standoff represents a significant challenge to the FBR’s approach in using the ADR formula to determine tax obligations for banks. Askari Bank’s case underscores a broader concern within Pakistan’s banking sector about regulatory overlap, especially in light of the SBP’s regulatory prerogatives. If the IHC ultimately sides with Askari Bank, the decision could have wider implications, potentially prompting a reassessment of the FBR’s policies concerning bank taxation.
As the IHC awaits FBR’s response and subsequent arguments from both sides, the court’s temporary restraining order serves as a safeguard for Askari Bank against immediate tax collection. The ongoing judicial review of Rule 6C(6A) and its potential clash with the SBP’s statutory authority could set a precedent impacting both the regulatory and operational landscape for Pakistan’s banking sector in the future.