The financial managers of the country are deliberating on levying a windfall tax on the banking sector’s earning that soared in 2022, allegedly, on the back of heavy dollar speculation. The tax is to bridge the revenue gap that has developed between actual collections and targets for the fiscal year 2023.
As per a report by Topline Securities, “Foreign exchange income of listed banks as reported under the head of ‘foreign exchange income’ of bank’s P&L surged to Rs89bn in 9M2022, which is up from just Rs32bn in 9M2021 and was much higher than its historical averages. It is important to note that due to falling FX reserves, PKR remained under severe pressure and weakened by 23% against US$ in 9M2022. It peaked at Rs240 against US$ in the interbank market in July 2022 before settling to around Rs227-228. This extreme volatility may have resulted in high spreads charged by banks.”
During the second half of the previous year, the country was faced with a severe forex liquidity crisis and the banks were being approached by importers to open as well as retire LCs for various commodities; most notably, oil. It was this period where the banking sector made bulk of its forex profits by charging the customers with exuberant rates and exploiting the massive spread in the dollar prices.
Subsequently, the SBP took notice of the issue and launched an investigation against the collusive and speculatory behaviour of the banks. The Deputy Governor State Bank, during a briefing to the National Assembly’s Standing Committee on Finance, assured of action against the speculating banks.
If implemented, the tax can cause a significant dent in the profitability of the banks. “Based on our analysis, if government imposes an additional 10-30% tax rate on foreign exchange income of banks (as reported in P&L) over and above the corporate tax rate, 2022 profitability of the banking sector will be impacted by around 4-11% on average,’’ read the Topline Securities’ recent report.
Corporate taxation expert, Dr. Ikram ul Haq said, “The banks have closed their books for the fiscal year 2023 therefore, a new tax through amending the Income tax ordinance 2001 cannot be levied. However, as per the constitution, the government can implement a new tax under the guise of corporate tax introduced through a presidential ordinance. Whatever the case be, this would be the first instance of application of such tax after the implementation of the excess profit tax by the rulers of British India in 1940.”
Adding on the matter of banking taxation, Havaris Arshad, a Senior Chartered Accountant stated, ‘‘The normal tax year coincides with the fiscal year (July-June). However, for the banking sector the tax year is same as the calendar year (January-December). Therefore, banks have closed their books for the tax year 2023 on 31st December 2022.”
Though the precedent of such tax dates back to the pre-partition era, the intention behind that levy was rather vile.
As per an article published in New Internationalist, “During the 1940s, the colonial government printed extraordinary amounts of money for military expenditure. All this new demand caused prices to soar, particularly for staple goods. The price of rice increased by 300 per cent. But because wages did not rise accordingly, ordinary people were pushed even deeper into poverty, forcing them to dramatically curtail their consumption of food and other goods. Meanwhile, any additional profits that fell into the laps of business owners as a result of the price inflation were taxed by the colonial state.
“This time around, the government is essentially desperate and is trying hard for ends to meet. “. If the government imposes an additional 10-30% tax on banks foreign exchange income than it could collect an additional Rs12-36bn as we anticipate foreign exchange income from bank’s to clock in at around Rs120bn in 2022.” The Topline report further stated.
The imposition of any further tax is likely to be challenged by the banks that were also able to get an exemption from the retrospective application of the super tax announced in the budget last year.
As per a report by Topline Securities, “Foreign exchange income of listed banks as reported under the head of ‘foreign exchange income’ of bank’s P&L surged to Rs89bn in 9M2022, which is up from just Rs32bn in 9M2021 and was much higher than its historical averages. It is important to note that due to falling FX reserves, PKR remained under severe pressure and weakened by 23% against US$ in 9M2022. It peaked at Rs240 against US$ in the interbank market in July 2022 before settling to around Rs227-228. This extreme volatility may have resulted in high spreads charged by banks.”
During the second half of the previous year, the country was faced with a severe forex liquidity crisis and the banks were being approached by importers to open as well as retire LCs for various commodities; most notably, oil. It was this period where the banking sector made bulk of its forex profits by charging the customers with exuberant rates and exploiting the massive spread in the dollar prices.
Subsequently, the SBP took notice of the issue and launched an investigation against the collusive and speculatory behaviour of the banks. The Deputy Governor State Bank, during a briefing to the National Assembly’s Standing Committee on Finance, assured of action against the speculating banks.
If implemented, the tax can cause a significant dent in the profitability of the banks. “Based on our analysis, if government imposes an additional 10-30% tax rate on foreign exchange income of banks (as reported in P&L) over and above the corporate tax rate, 2022 profitability of the banking sector will be impacted by around 4-11% on average,’’ read the Topline Securities’ recent report.
The imposition of any further tax is likely to be challenged by the banks that were also able to get an exemption from the retrospective application of the super tax announced in the budget last year.
Corporate taxation expert, Dr. Ikram ul Haq said, “The banks have closed their books for the fiscal year 2023 therefore, a new tax through amending the Income tax ordinance 2001 cannot be levied. However, as per the constitution, the government can implement a new tax under the guise of corporate tax introduced through a presidential ordinance. Whatever the case be, this would be the first instance of application of such tax after the implementation of the excess profit tax by the rulers of British India in 1940.”
Adding on the matter of banking taxation, Havaris Arshad, a Senior Chartered Accountant stated, ‘‘The normal tax year coincides with the fiscal year (July-June). However, for the banking sector the tax year is same as the calendar year (January-December). Therefore, banks have closed their books for the tax year 2023 on 31st December 2022.”
Though the precedent of such tax dates back to the pre-partition era, the intention behind that levy was rather vile.
As per an article published in New Internationalist, “During the 1940s, the colonial government printed extraordinary amounts of money for military expenditure. All this new demand caused prices to soar, particularly for staple goods. The price of rice increased by 300 per cent. But because wages did not rise accordingly, ordinary people were pushed even deeper into poverty, forcing them to dramatically curtail their consumption of food and other goods. Meanwhile, any additional profits that fell into the laps of business owners as a result of the price inflation were taxed by the colonial state.
“This time around, the government is essentially desperate and is trying hard for ends to meet. “. If the government imposes an additional 10-30% tax on banks foreign exchange income than it could collect an additional Rs12-36bn as we anticipate foreign exchange income from bank’s to clock in at around Rs120bn in 2022.” The Topline report further stated.
The imposition of any further tax is likely to be challenged by the banks that were also able to get an exemption from the retrospective application of the super tax announced in the budget last year.