Home Business Top Banks Earnings to Rising Significantly After Removal of ADR-Based Tax

Top Banks Earnings to Rising Significantly After Removal of ADR-Based Tax

The removal of advance-to-deposit ratio (ADR) based tax retrospectively will result in an upward revision of the earnings of UBL, HBL, MCB, and ABL (CY22) earnings.

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ADR-Based Tax
ADR-Based Tax

The removal of advance-to-deposit ratio (ADR) based tax retrospectively will result in an upward revision of the earnings of UBL, HBL, MCB, and ABL (CY22) earnings.

According to a report by Arif Habib Limited (AHL), banks with ADR higher than 50 percent are well positioned against the ADR-related tax while those with an ADR less than 50 percent could be levied with an effective tax rate of up to 53 percent.

In a recent development, Finance Minister Miftah Ismail announced the withdrawal of the ADR-related tax on a retrospective basis for the banking sector.

To recall, taxation on the banking sector is categorized into Corporate Tax, Super Tax, and ADR-related taxes. Corporate Taxes in the banking sector were raised from 39 percent to 45 percent in the Budget FY23. Moreover, for CY22, a 10 percent super tax was also imposed on banks.

In addition, taxable income attributed to investment in federal government securities is taxed at the rate of 55 percent if ADR is up to 40 percent, 49 percent if ADR falls in the 40-50 percent bracket, and at the rates provided in division II of part I of the first schedule if ADR exceeds 50 percent as on the last day of the tax year.

To highlight, banks were also supposed to pay ADR-related tax on CY21’s income from federal government securities in the outgoing quarter of CY22.

The recent announcement of the removal of ADR-based tax retrospectively will result in an upward revision of UBL, HBL, MCB, and ABL (CY22) earnings.

Banks with ADR higher than 50 percent are well positioned against the ADR-related tax while the rest (with ADR below 50 percent) are likely to be levied an effective tax rate of 50-53 percent from the earlier expected effective tax rate of 55-58 percent.

Moreover, the report expected an upward revision of 7-10 percent in the earnings of CY22 of the aforementioned banks.

However, an official notification in this regard is still awaited and according to the report, any reversal of tax charged by banks that have already announced 2QCY22 results (such as HBL and UBL) will be done once notification is issued.

 

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