Islamabad, Dec 30: The Federal Cabinet has approved the promulgation of an Income Tax Ordinance that introduces changes to the Advance Deposit Ratio (ADR) for banks. The new ordinance abolishes the proposed additional income tax of 10-15% on banks due to low ADR. However, the standard income tax rate for banks has been increased from 39% to 44% for the tax year ending on December 31, 2024. Starting from January 1, 2025, the tax rate will decrease to 43%, and further to 42% for tax year 2027 and beyond.
This increase in the tax rate to 44% is expected to generate an additional Rs. 60-70 billion in revenue for the government, but it will erode banking sector earnings by 10-12%. Meezan Bank (MEBL) has already accounted for a tax impact of Rs. 6 billion in its 9M2024 results, which will reduce the tax impact on its 4Q2024 accounts.
The tax change is generally negative for the banking sector as it requires banks to pay an additional 5% tax in 2024, 4% in 2026, and 3% from 2027 onward, regardless of the ADR level. While rumors of higher taxes had been circulating, the market had largely incorporated this information.
The report suggests maintaining a market-weight stance on the banking sector due to attractive valuations, with Habib Bank (HBL) and Meezan Bank (MEBL) identified as top picks for 2025. Previously, many banks had an ADR of below 40%, and with the new ordinance, the effective tax rate for these banks will now be 54%, down from a previously expected rate of 59%. The effective tax rate is expected to decrease by 100 basis points in the next two years.
