KARACHI: The government is likely to resort to heavy taxation on the banking sector in the 2023-24 budget as Islamabad looks for easy sources of revenue in a fiscally challenged environment.

“We believe the 2023-24 budget will likely carry more negative earnings implications for banks,” said Amreen Soorani, head of research at JS Global.

There’s a likelihood of super tax increasing from the current level of four per cent for the banking sector to 10pc, which will lead to an earnings impact of 13pc for 2023, she said in a research report released to clients on Wednesday.

The banking sector already pays a higher corporate tax of 39pc versus the 29pc rate applicable to other corporate entities. The sector also pays a 39pc tax rate on other income sources like capital gains and withholding tax on dividends.

Ms Soorani said an increase in the super tax to 10pc this year will result in base earnings’ estimates to decline by 11pc on an annualised basis.

Another likely tax measure in the upcoming budget is a flat tax on income generated from federal government securities (FGS). While there have been precedents for such tax measures, it has widely been linked to the respective advances-to-deposits (ADR) level of the bank as a way to encourage lending.

Ms Soorani said there’s a likelihood of tax on this income to be charged at a flat rate while disregarding the ADR level. The brokerage ran a sensitivity analysis by applying the flat tax rate of 15pc and 30pc on income generated from FGS, which resulted in an average earnings decline of 12pc and 25pc, respectively.

Published in Dawn, June 8th, 2023