Major Tax Evasion Scandal Hits Banking Sector: Allegations of ADR Manipulation Surface
By Salman Khan:
Islamabad: The banks have been reportedly involved in tax evasion scam by manipulating the Advance to Deposit Ratio (ADR).
The chargeability of income, profits, and gains of a banking company is outlined as follows. At present, a banking company’s income, profits, and gains are charged to tax at the standard rate of 39%.
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Additionally, a banking company is liable to pay Super Tax at a progressive rate ranging from 1% to 10%, depending on graduated income slabs between Rs. 150 million and Rs. 500 million or more. From the tax year 2022 onwards, a banking company’s income, profits, and gains from investment in Federal Government securities have been subjected to a higher tax rate of 55% or 49% if the gross Advance to Deposit Ratio (ADR) was up to 40% or between 40% and 50%, respectively.
Where the ADR ratio exceeds 50%, such income, profits, and gains from investment in Federal Government securities are subjected to the standard tax rate of 39%.
Sources told Newztodays that banking companies are tempted to manipulate the ADR ratio, creating deadweight loss. Following the enactment of these provisions, banks approached the courts and secured stay orders against the ADR tax for the tax year 2022.
For the tax year 2023, banks manipulated advances and deposits to keep the ADR ratio above 50%. In the tax year 2024, the ADR tax was rescinded through the Finance Act, 2023. However, for the tax year 2025, the same taxation rates were to be applicable based on ADR ratios as of 30th September 2024. Banks not only challenged the ADR regime in court but also manipulated the ratio in the fourth quarter of the year to keep it above 50%, thereby avoiding the ADR tax as per their interpretation.
The current economic situation of the country might necessitate the Federal Government borrowing money from banking companies to smoothly run the State’s financial affairs, which could result in an adverse ADR ratio.
Given the higher tax rates imposed on income, profits, and gains from investment in Federal Government securities, this may adversely affect the ADR, leading to a higher tax liability of 49% or 55%.
Banking companies are thus tempted to manipulate the ADR ratio, creating deadweight loss. Following the enactment of these provisions, banks approached the courts and secured stay orders against the ADR tax for the tax year 2022.
For the tax year 2023, banks manipulated advances and deposits to keep the ADR ratio above 50%. In the tax year 2024, the ADR tax was rescinded through the Finance Act, 2023. However, for the tax year 2025, the same taxation rates were to be applicable based on ADR ratios as of 30th September 2024.
Banks not only challenged the ADR regime in court but also manipulated the ratio in the fourth quarter of the year to keep it above 50%, thereby avoiding the ADR tax as per their interpretation.
