Finance: The government-bank relationship.

When banks start demanding higher and higher returns on the government treasury bills and bonds, the government retaliates by imposing a higher tax on their income. This is exactly what the next fiscal year's budget tells us.

And when banks continue to invest heavily in government debt securities taking and charging excessive returns knowing that the doors of government borrowing from the central bank are shut, the government reminds them that in so doing, banks are ignoring private sector credit demand.

And sometimes this reminder comes in the form of higher taxes imposed on the income from investment in the government debt securities of the banks that do not make enough loans to the private sector.

The next year's budget also exposes this aspect of the government-bank relations. In the budget for 2022-23 starting July 1, the government has raised the total incidence of taxes to 47 per cent, inclusive of the newly-introduced 2pc poverty alleviation tax from currently 39pc.

Taxing banks at exorbitantly high rates at this stage requires a serious re-think

The corporate tax on banks alone has been increased to 45pc inclusive of 4pc supertax from 35pc corporate tax plus 4pc supertax or a total of 39pc. An additional 2pc poverty alleviation tax would naturally apply to banks - as most of them earn Rs300 million-plus income per year - the threshold for this new tax introduced to shift 'the tax burden from the poor to the rich.'

To discourage over-exposure of banks in treasury bills and bonds that invest in them ignoring the private sector, the government has also raised from 39pc to 47pc the tax rate on income from their government securities. Even this elevated rate would apply to those banks that manage their advances to deposit ratio (ADR) - a measure of how generously they lend to the private sector - over 50pc.

For those banks that manage their ADR between 40pc-50pc, the tax rate has been increased from 41.5pc to 49pc. The highest tax rate on banks' income is from government securities ie currently 44pc to 55pc.

Banks are not happy with these measures. They are protesting silently with the government besides lamenting before the central bank that such measures would depress their earnings too deeply and would prove counter-productive.

Whether the government would budge and provide some relief to banks is a different matter. But the fact remains that the government has levied higher taxes on banks on the premise that they have 'earned...