ISLAMABAD – In a move aimed at closing gaps between what banks report as income and what they actually pay taxes on, Pakistan’s Federal Board of Revenue (FBR) has overhauled key tax provisions for the banking sector. The changes, set to take effect from July 1, 2025, are part of the broader Finance Act 2025 reforms.
The revisions apply specifically to the Seventh Schedule of the Income Tax Ordinance 2001, which governs the taxation framework for banking companies. The FBR’s updated circular outlines these adjustments, which focus on narrowing the discrepancy between declared profits and taxable earnings — a long-standing concern within Pakistan’s financial oversight landscape.
Refined Expense Deductions Under New Guidelines
Among the key updates are changes to how certain expenses are treated for tax purposes. Banks will now be allowed to deduct specific types of operational costs — such as rent and office refurbishment — but only within defined parameters. This change aims to bring more clarity and uniformity to the treatment of such expenses, which have previously been a grey area open to interpretation.
The treatment of bad debt deductions — a major area of contention in previous audits — has also been made more stringent. Banks will need to follow clearer and more structured guidelines when claiming write-offs for bad loans, limiting opportunities for abuse or misstatement.
External Auditors Now on the Hook
In a notable step toward tightening accountability, the FBR has introduced mandatory filing requirements for external auditors verifying bad debt claims. This move is intended to strengthen oversight and improve the credibility of deductions claimed under this category, which has often been scrutinized for inconsistencies.
Implementation Oversight Through New Redressal Mechanism
To facilitate smoother implementation and resolve industry concerns, the FBR is establishing a redressal committee. This body will include both tax officials and representatives from the banking sector, providing a platform for dialogue and dispute resolution as the new rules are rolled out.
By revising the tax treatment of bank income and tightening controls around deductions, the FBR appears focused on reducing revenue leakages while improving transparency in the financial sector. The success of this shift, however, will depend heavily on how well both banks and auditors adapt to the new compliance environment in the coming year.
