THE caretaker cabinet’s decision to retrospectively impose a one-off 40pc “windfall” tax on bank profits earned from their foreign exchange businesses in 2021 and 2022 would yield either “negligible” additional revenues in taxes for the government against its expectations of collecting Rs40bn from the measure, or end up punishing the banks. Although the provision to impose the windfall tax of up to 50pc on profits and gains arising from abrupt commodity prices, exchange gain etc was introduced under Section 99D of the Finance Act 2023 by the previous PML-N-led set-up in the budget for the present year, it refrained from implementing the decision in view of the heavy existing tax burden on the banks and other corporate entities. That the caretakers have chosen to target banks under this provision is unsurprising since they have reported a hefty profit of Rs110bn in the last two calendar years of 2021 and 2022 from the dollar trade. Besides, banks have in the recent past repeatedly been accused of making massive profits through speculative dollar trade and transactions in a highly volatile forex market, leading to large exchange rate depreciation. The SBP has already investigated and penalised the banks involved in the breach of its regulations on forex transactions.

With Section 99D of the Finance Act requiring that the further (windfall) tax should not exceed 50pc, the government stands to rake in maximum 3pc — nearly 11pc if super tax of 4pc/10pc is excluded — of further tax since the banks have already paid approximately 47pc effective tax, including super tax, on their forex income earned in the last two years. In case the government interprets the section differently and decides to collect 40pc as further tax, it will be like punishing the banks for being in this business by taking away almost entire profits on their forex transactions. Then, there is confusion around the definition of windfall profits, and the mechanism to segregate the forex income between recurring and windfall profits. Additionally, it is unclear who will compensate banks for the hit they took at the beginning of the present calendar year due to quick changes in the forex market. For these reasons many analysts expect the decision to be contested by banks. In any case, the banks are not going to produce more cash for the government, at least not without a good fight.

Published in Dawn, November 18th, 2023