The Federal Board of Revenue’s (FBR) imposition of the Advance to Deposits Ratio (ADR) tax has led to significant disruptions in the banking sector. Banks have resorted to various strategies to mitigate the impact of this tax, including:
- Aggressive Lending: Banks have been actively seeking lending opportunities, often at sub-par rates, to increase their ADR and avoid the additional tax burden.
- Imposing Service Charges: Some banks have imposed service charges on large deposits to discourage customers from keeping their money in banks.
- Arbitrage Opportunities: Borrowers have taken advantage of the situation by investing loan funds in government securities, which offer risk-free returns.
The State Bank of Pakistan (SBP) has intervened to address these issues and mitigate the negative consequences of the ADR tax. The SBP has taken the following steps:
- Removal of Service Charges: The SBP has directed banks to remove service charges on deposits, as they were seen as an unfair burden on customers.
- Adjustment of Minimum Deposit Rate (MDR): The MDR, which sets a minimum interest rate on deposits, has been adjusted to ensure that banks continue to offer competitive rates to depositors.
- Phasing Out MDR for Sophisticated Investors: The SBP is phasing out the MDR for sophisticated investors, encouraging them to invest directly in government securities and other financial instruments.
While these measures have helped to alleviate some of the negative impacts of the ADR tax, the underlying issue remains. The ADR tax has distorted the banking landscape and created unintended consequences. The FBR should reconsider this tax and focus on more effective ways to boost revenue collection.
The SBP’s intervention demonstrates its commitment to maintaining financial stability and protecting the interests of depositors. However, the long-term solution lies in a comprehensive review of the tax policy framework to ensure it supports economic growth and financial inclusion.
