Government abolished additional tax on low ADR; increased corporate tax rate by 5%

ISLAMABAD: In a recent development, Federal Cabinet has approved the promulgation of an Income Tax Ordinance to implement changes in the Advance Deposit Ratio (ADR) for banks.

According to newspapers, the proposed additional income tax of 10-15% on banks due to low ADR is to be abolished.FBR Chairman emphasizes need to improve Tax-to-GDP ratio

However, the standard income tax for banks has been increased from 39% to 44% for the current tax year ending on Dec 31, 2024. For tax year 2026, starting from Jan 01 2025, the rate will go down to 43%. For tax year 2027 and onwards, the rate will be 42%, according to the draft ordinance.

The current super tax of 10% will continue to remain unchanged.

This increase in the tax rate to 44% is expected to generate additional revenue of Rs60-70bn for the government and erode banking sector earnings by 10-12%, in our view.

Among listed banks, Meezan Bank (MEBL) has already accounted for a tax impact of Rs6bn in 9M2024, resulting in a lower impact on its 4Q2024 accounts.

This development is negative for the banking sector, as banks are now required to pay an additional 5% tax in the current year, 4% in 2026, and 3% from 2027 onwards, regardless of the ADR level.

The rumors of higher taxes on banks have been circulating in the market in the past few days, and we believe the market has already incorporated the impact to some extent.

We maintain a Market Weight stance on the sector due to attractive valuations, with Habib Bank (HBL) and Meezan Bank (MEBL) as our top picks for 2025.