Bankers across Pakistan grow uneasy as their pleas to get tax exemptions fall on deaf ears.
The government, as per the conditions attached to the IMF loan, can not exempt banks from the “additional” tax of PKR 197 billion.
The reason why banks find themselves in this situation is because of their excessive lending to the government. As per lending regulations, banks are not supposed to withhold loans from the private sector while extending credit to the government.
To discourage this practice, the government introduced a tax rule in 2022 to encourage banks to increase the number of loans to the private sector. Three major banks alone face a staggering PKR 71 billion tax bill alongside other banks that did not comply with this rule.
While lawmakers in Islamabad have expressed interest to relieve banks of these additional taxes, IMF rules have their hands tied. Earlier in the year, tax exemptions were in the works. However, Prime Minister Shehbaz Sharif scrapped the idea.
Following the glaring silence and lack of action regarding the exemption of additional taxes, banks might now scramble to give out billions in loans to the private sector to avoid the tax.
This spells great news for businesses who are seeking loans as the current situation will likely ease borrowing. With the two per cent State bank slash in interest rates last month and the possibility of future decreases, it seems like high time for businesses to start expanding using debt.
The primary beneficiaries of the potential loans will most likely be small businesses. The reason behind this is their lack of assets to pledge as collateral to secure funding alongside the lack of good will that currently exists as a result of a non-existent credit history.
Ultimately, though, through paying taxes or extending loans, the banks will have to contribute. Either way, the economy is likely to benefit – whether by reducing the federal budget deficit or by fueling business activity.
The choice may not favour the banks, but the country is likely to benefit regardless.
