ISLAMABAD: In what appears to be a major move, the Federal Board of Revenue (FBR) on Wednesday notified the imposition of a 40 per cent tax on windfall income, profit and gains earned by banks from foreign exchange transactions over the past two years.

Banks are required to deposit the tax amount with the FBR by Nov 30. However, the deadline may be extended to Dec 15, if a valid justification is provided to the Commissioner of Income Tax.

The one-time tax is projected to generate a revenue of approximately Rs42 billion.

In October last year, the then Finance Minister Ishaq Dar pledged to take action against banks accusing them of manipulating exchange rates and making substantial profits. However, no visible action was taken against any bank during his tenure.

The only information that surfaced was a briefing to the Senate’s Standing Committee on Finance, where the State Bank of Pakistan governor disclosed that eight banks had received notices for their alleged involvement in manipulating exchange rates. However, no further details or outcomes were made public following the issuance of these notices.

Caretaker Prime Minister Anwaarul Haq has given the green light to the decision to tax the windfall profits of banks. This is a step that the previous coalition government had contemplated but was unable to put into action.

The SRO1588 of 2023 has outlined a formula to determine the windfall income, profit and gains of banks. This formula uses the declared profits from the years 2015 to 2020 to calculate an average profit. This average profit is then subtracted from the bank profits for the years 2021 and 2022.

Any profits exceeding this average for the years 2021 and 2022 are deemed as windfall income, profit and gains.

As per the notification, the banking sector has been designated as a specific sector under section 99D. It is stipulated that the payment of the additional tax should be made to the federal treasury via a prescribed challan or a computerised payment receipt.

The federal cabinet’s endorsement of the windfall tax was a response to intense criticism of banks, which reportedly made substantial profits of Rs110 billion in 2021 and 2022 through speculative rupee-dollar trading.

The Prime Minister’s Office stated that the cabinet approved a proposal from the FBR. This proposal highlighted that the Finance Act 2023, had introduced Section 99D to the Income Tax Ordinance 2021, paving the way for the imposition of a tax on the windfall profits of banks. The caretaker government remained firm in its decision to tax the income banks generated from speculative currency trading.

Published in Dawn, November 23rd, 2023