Cabinet mulling to tax windfall income of banks tomorrow

By: Shehzad Paracha
ISLAMABAD: The government is planning to impose taxes on windfall profits earned by banks from the volatile rupee-dollar exchange rate in fiscal year 2021-22.

While the final taxation figures remain to be disclosed, the proposal has been in the works since January 2023. It gained traction in June when an amendment was introduced in the Income Tax Ordinance 2001 to address such windfall income.

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The impending decision is now set to take center stage in tomorrow’s cabinet meeting, with the agenda explicitly listing “Tax on Windfall Profits of Banks Earned on Foreign Exchange Transactions during Calendar Years 2021 and 2022” as the third point for discussion.

IMPACT

To contextualize the potential impact of this tax policy, it is essential to examine the financial figures for the specified years and the current calendar year.

According to a news report from January, Director of Research at Topline Securities Umair Naseer shared that the foreign exchange income for banks listed on the Pakistan Stock Exchange surged nearly threefold to Rs89 billion in the first nine months of 2022, compared to Rs32 billion in the same period in 2021.

For the ongoing year, independent economic analyst A. A. H. Soomro shared with HUM News English that the top eight banks have reported approximately Rs40 billion in income before tax on foreign currency transactions from January to November 2023.

A conservative estimate suggests that a 10 to 30 per cent tax could generate between Rs4b to Rs12b in taxes for the current year alone. Multiply that by three for the time period under consideration, and the accumulative amount could provide a significant boost to the Federal Board of Revenue’s (FBR) tax collection goals.

The government’s consideration of this tax measure aligns with efforts to address the tax revenue shortfall and potentially satisfy the International Monetary Fund (IMF), which has been advocating for increased taxation measures.

Sources suggest that discussions with the IMF’s technical team have included this proposed tax on windfall profits among various measures to enhance tax collection.

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While critics argue that banks already face significant taxation, Soomro notes, “Banks are okay to be taxed higher for such one-off incomes instead of being pressured and targeted for any manipulations or even accusations on that.”

CRACKDOWN ON ILLEGAL FOREX DEALERS

Recent SBP reforms aimed to crackdown on illegal foreign exchange dealers have also brought a substantial portion of foreign currency dealings within the banking sector’s purview. Notably, several Pakistani banks have responded to these reforms by entering the exchange company arena, signaling an expansion of foreign currency business within the banking sector.

Observers view the move to tax windfall profits generated by banks through foreign exchange fluctuations as a logical step, considering the significant revenue streams and the expanded role of banks in foreign currency dealings.

However, Soomro cautions that while this may enhance short-term tax revenues, it may not be a sustainable solution, potentially creating disincentives for banks to engage in their core operations.