The federal cabinet of Pakistan has approved the promulgation of the Income Tax Amendment Ordinance 2024, which includes a significant tax change for the banking sector. The ordinance abolishes the 15% additional tax on profits made by banks from lending to the government while raising the standard income tax rate for banks from 39% to 44%. This change, made just days before the fiscal year closes for banks, is expected to generate approximately Rs65 billion for the government by December 31, 2024.
Prime Minister Shehbaz Sharif chaired the meeting that formalized the agreement between the Pakistan Banks Association (PBA) and the federal government. The ordinance, which is awaiting President Asif Ali Zardari’s approval, provides legal cover for past transactions and revises the tax framework for banks in Pakistan.
Under the new tax structure, the 44% income tax rate will apply for the current tax year ending December 31, 2024. The rate will gradually decrease in subsequent years, reducing to 43% in 2026 and 42% in 2027 and beyond. Previously, banks had been required to pay an additional 15% tax on profits made from lending to the government beyond a certain threshold. This additional tax, introduced in 2022, was part of an effort to encourage banks to increase lending to the private sector. However, it also led banks to adjust their lending portfolios to avoid triggering the additional levy.
Deputy Prime Minister Ishaq Dar led the negotiations, securing a compromise with the banking sector. The government had initially considered waiving the 15% tax in June 2024 without a way to recover the revenue losses. However, this plan was abandoned after public scrutiny, with banks increasing private-sector lending to avoid the additional levy. The revised approach, agreed upon by the government and the banking sector, includes abolishing the 15% additional tax while raising the standard income tax rate to 44%. Despite the higher tax rate, sources suggest that banks may ultimately benefit, as the full recovery under the previous rules could have exceeded 45%.
In addition to the tax rate changes, the ordinance also revises the First and Seventh Schedules of the Income Tax Ordinance, clarifying how banks will calculate their gross advances-to-deposit ratios (ADRs). The original 15% additional tax had prompted banks to make adjustments to their lending practices, and the new framework aims to create a more predictable and stable tax environment.
Minister of State for Finance Ali Pervaiz Malik described the ordinance as a balanced deal that aims to encourage capital formation and promote voluntary lending to the private sector. He emphasized that the government does not intend to directly intervene in private lending markets but seeks to create an environment that supports lending and investment.
This move is part of the government’s ongoing efforts to address the significant revenue shortfall faced by the Federal Board of Revenue (FBR). As of December 27, 2024, the FBR had collected Rs5.08 trillion, falling short of its target of Rs6.009 trillion for the year. The revised tax rate is expected to help bridge this gap and meet conditions set by the International Monetary Fund (IMF).