Super tax on banking industry – is it wise?

Demanding higher returns on government treasury bills is nothing unusual. It is the right of the banks (and in fact any business entity) to maximize profits in a legal and ethical manner. However, the government also has the right to guard its own interest and one of the ways is to increase the rate of taxation on the banks (and other entities).

The banks may continue to invest in debt securities while the government reminds them that the credit demands of the private sector should not be ignored. Whether the banks pay heed to such advice is based on their assessment of the overall economic situation.

This is the sort of a situation in which the aces are held by the government. One of the aces played by the government, whenever needed, comes in the form of imposition of higher taxes on the income of banks (and of course other entities).

Thus the government raised taxes on the already over-taxed banking industry in the budget for year 2022-23 starting July 1.

During the last financial year, the banks were being taxed at the rate of 35% plus 4% super tax i.e. a total tax of 39%. In the current finance bill the government has decided to tax the banks at the rate of 49%. The banking industry sources have pointed out that what the government has actually done is that they have considered 39% (35% tax rate + 4% super tax) as the base tax rate and have then applied 10% super tax, thus making it 49%.

In all fairness, the government should have considered 35% as base tax rate of last year and then should have applied the super tax of 10% to make it 45% and not 49%. Since banks were already paying 4% super tax, an additional 6% tax should have been further imposed to take it to 45% in the current finance bill.

The banking industry, which is already heavily taxed, is naturally not happy. In order to address the issue, they have approached the government as they fear that such measures are bound to affect their earnings and, in the long-run, will be detrimental to the overall economy of the country.

It remains to be seen whether the government would change its position and provide relief to the banks or not as under the present circumstances, the government is in an extremely tight corner in its negotiations with the IMF (International Monetary Fund). While there is a staff level understanding that has been reached with the lending institution, the government is still extremely cash strapped and it would be difficult for it to provide any concession to the banking industry.

It can be assumed, though, that the government has levied these taxes on the banking industry with a view that this important sector of the economy earns huge profits. The statement of the finance minister Dr. Miftah Ismail during the budget session makes this fact very obvious.

While the government may be approaching the issue rationally keeping in view its constraints, this approach has its pitfalls and there is every chance that it may not produce the desired results. The banking industry, as a whole may be required to adopt various innovative measures to off-set the impact of these new taxation measures.

The government also needs to look inwards and bring in stronger fiscal discipline in order to avoid reverting to banks to borrow more money. However, it is in the interest of the government if the banks remain actively involved in generating more business that would ultimately bring in more tax revenue for the government.

At this stage, the challenge for the banks is very serious as they are expected to deliver financial services at reasonable and affordable rates but the new taxation measures appear to put a major roadblock in their quest to achieve that objective. However, with the imposition of super tax, the government has given an opportunity to banks to jack up their financial service charges and ultimately, it will be the poor people of this country who will have to bear the brunt of such unwise taxation measures.

Since the government has been imposing mini-budgets, by reviewing different tax measures (and in the process getting its fair share of bashing by the opposition), it would be prudent if the finance ministry reviews its strategy and think of some other sectors that may fill its coffers without directly burdening the masses.

Copyright Business Recorder, 2022