Income Tax (Amendment) Ordinance, 2024: A Comprehensive Overview of New Tax Regulations

The promulgation of the Income Tax (Amendment) Ordinance, 2024 by President Asif Ali Zardari on Monday night introduces significant changes to the Advance Deposit Ratio (ADR) of banks. These amendments are expected to generate an estimated revenue of Rs70 billion by December 31, 2024, substantially addressing the Federal Board of Revenue’s (FBR) tax collection shortfall. Below, we explore the implications, key details, and impacts of these changes on the banking sector.

Tax Rate Adjustments for the Banking Sector

Under the new ordinance, the First Schedule and Seventh Schedule of the Income Tax Ordinance, 2001, have been amended to redefine the tax rates for various types of companies. For banking companies, the following tax rates apply:

• 44% for Tax Year 2025
• 43% for Tax Year 2026
• 42% for Tax Year 2027 and onwards

These adjustments represent a notable increase in taxation for the banking sector, compared to rates for other companies:

• Small Companies: 20%
• Other Companies: 29%

Clarification on Gross Advances to Deposit Ratio (ADR)

The ordinance specifies the method for calculating the gross advances to deposit ratio. For this purpose, the “gross advances and deposits” are defined as:

The amounts disclosed in the annual audited accounts at the end of the accounting period.

This approach ensures transparency and uniformity in tax assessments. Importantly, from Tax Year 2025 onwards, the profits and gains of banking companies will be subjected exclusively to the tax rates specified under Division-II of Part-I of the First Schedule, overriding earlier provisions.

Revenue Generation and Economic Implications

The FBR anticipates collecting Rs70 billion in additional revenue by the end of 2024, a critical step in reducing tax collection deficits. This increase in revenue from the banking sector aligns with broader fiscal strategies aimed at bolstering economic stability and meeting national budgetary targets.

Impact on Banking Sector Profitability

The heightened tax rates may impose additional financial burdens on banks, potentially leading to:

• A recalibration of profit margins.
• Adjustments in banking operations and strategies.
• Possible implications for consumer banking products and interest rates.

Boost to Government Revenue

This ordinance represents a deliberate effort to leverage the banking sector’s profitability as a means of enhancing national revenue. With consistent growth in deposits and lending, banks are positioned to absorb these changes while continuing to drive economic activity.

Comparison with Previous Tax Structures

The revised tax rates underscore a significant departure from prior structures, particularly for banking institutions. For perspective:

• Previously, the average tax rate for banks ranged between 37-39%, depending on annual profits.
• The new ordinance introduces a sharp escalation, underscoring the government’s focus on maximizing tax collection from high-performing sectors.

Policy Rationale and Strategic Objectives

The amendments reflect the government’s commitment to:

1. Strengthening Fiscal Discipline: By targeting a key sector, the policy aims to bridge revenue gaps effectively.
2. Promoting Transparency: Clear guidelines on ADR calculations foster accountability within the banking industry.
3. Sustaining Economic Growth: Despite increased tax obligations, the banking sector’s robust performance is expected to cushion the broader economic impacts.

Anticipated Challenges and Industry Response

Challenges for Banks

• Operational Adjustments: Banks may need to reassess lending and deposit strategies to maintain compliance with the new tax requirements.
• Profitability Concerns: Higher tax liabilities could impact shareholder returns and long-term growth plans.

Industry Response

The banking industry has historically demonstrated resilience in adapting to regulatory changes. Industry stakeholders are expected to engage with policymakers to ensure practical implementation and address potential challenges.

Key Takeaways for Stakeholders

1. Banking Companies: Must prepare for increased tax liabilities and align operational strategies accordingly.
2. Investors: Should anticipate shifts in profitability trends within the banking sector.
3. Regulators: Will need to monitor compliance and ensure smooth enforcement of the ordinance.

The Income Tax (Amendment) Ordinance, 2024 sets a precedent for targeted fiscal measures in Pakistan. As tax rates gradually decrease post-2025, the long-term implications for economic growth and sector performance will become clearer. Stakeholders must remain proactive in navigating these regulatory changes to sustain profitability and compliance