KARACHI: Finance Minister Miftah Ismail said on Friday banks won’t have to pay higher tax rates for maintaining a low advances-to-deposits ratio (ADR) on their earnings from 2021.

Speaking at a gong-ringing ceremony at the Pakistan Stock Exchange (PSX), Mr Ismail said that contrary to the “assumption” among banks, the increased tax rates wouldn’t be imposed retrospectively.

“We’ve spoken to the banks. We’re correcting that mistake. The special tax on (the basis of) ADR won’t be applied retrospectively,” he said while directly addressing at least three bank presidents who were present in the trading hall of the PSX.

Through the latest Finance Act, the government increased the tax rates on the interest income that banks earn on their investments in treasury bills as well as Islamic and conventional bonds.

The government notified in the Finance Act different rates based on the banks’ ADRs — an indicator that shows loans as a percentage of deposits. A low ADR means the bank is being complacent by loaning out a smaller chunk of its deposits. Such banks then park disproportionately higher portions of their liquidity in risk-free sovereign papers and earn profits effortlessly.

In contrast, a high ADR means the bank is giving out a larger share of its deposits in the shape of advances and promoting economic activity.

The Finance Act increased the tax rates on investment income from 35pc to 39pc for banks maintaining ADRs of 50pc or higher. The rate went up from 37.5pc to 49pc for lenders having ADRs in the range of 40pc and 50pc. Banks with less than 40pc ADRs will have to pay this tax at the rate of 55pc.

“Banks that have announced their financial results for the April-June quarter already incorporated the higher tax rates on a retrospective basis,” JS Global Head of Research Amreen Soorani told Dawn on Friday.

For example, Habib Bank Ltd posted consolidated earnings of Rs3.49 billion in the April-June quarter, down 63pc from a year ago. This decline was because of the increased super tax rate to 10pc and “retrospective implementation of the increased tax rate on low ADR maintenance”, Syed Noman Ahmed of Insight Securities wrote in a research note after holding a conference call with the bank officials.

Focus on export promotion

With regard to the macro-economic situation, the finance minister said he planned to curb imports for the next quarter, although the restrictions would slow down the pace of economic growth.

He said he didn’t believe in the import substitution model, which seeks to replace foreign imports with domestic production.

“I think we should focus solely on the export promotion model,” he said while referring to the economic theory that favours increased participation in international trade by allocating greater resources to the export-oriented sectors without creating price distortions in the economy.

He said the depreciation in the rupee’s value was a result of dollar outflows in the shape of import payments consistently outpacing the dollar inflows.

“We have to control the budget deficit this year,” he said, adding that the average yearly budgetary gap in the five years of the PML-N’s last government was Rs1.6 trillion versus the annual average of Rs3.5tr during the last four years.

“No country can grow and be stable with this kind of current account deficit,” he said.

According to Dawn.com, Mr Ismail said he believed the tax imposed on small traders had been “very adequate and good”. “We were asking for just Rs3,000 on a bill of Rs30,000. No shopkeeper earns less than Rs100,000 per month. Salaried people earning that amount pay more,” he said.

The finance minister said he had promised specific payments to the International Monetary Fund. “We will absolutely make sure if there is any loss of revenue, we will cover [it]... there’s a loss to the revenue of about Rs7bn.”

Published in Dawn, August 6th, 2022