Banks brace themselves for earnings' decline.

KARACHI -- The national bourse went down the toilet on Monday mainly because investors reacted to the sharp increase in tax rates on the index heavyweight banking sector.

If the parliamentarians pass the proposed changes in the tax regime for the banking sector in their present form, net profits of commercial banks will see a drop of around 20 per cent for 2022 and 15pc for 2023, according to Topline Securities. Banks' accounting period for financial statements aligns with the calendar year.

The federal budget seeks to increase taxes on banks under three different heads: a higher tax on corporate income, an additional tax on account of 'poverty alleviation' and increased taxes on interest income generated through government securities.

As of now, banks pay a corporate tax of 35pc and a super tax of 4pc, which bring the minimum applicable taxes to 39pc. The proposed budget increases the corporate tax rate to 45pc while eliminating the super tax altogether. In addition, it imposes a 2pc poverty alleviation tax for all companies posting profits of more than Rs300 million.

Therefore, the post-budget minimum applicable taxes on commercial banks equal 47pc.

'The sector has been laden with hefty taxes across the board over (the) expanding profits in the ongoing monetary tightening environment - in addition to being penalised for higher income from federal government securities,' said Amreen Soorani, head of research at JS Global.

The proposed budget seeks to increase the tax rate on banks' interest income that they derive by investing in government securities like treasury bills and investment bonds.

'Following the SBP Amendment Act 2021, the government has to rely mostly on commercial bank borrowing for financing its fiscal needs, which has resulted in a rise in secondary-market yields on government...

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