Karachi, November 23, 2023 – Banks in Pakistan likely to seek legal remedies in response to the recent imposition of a tax on windfall income or profit.
The banking sector has become the initial casualty of Section 99D of the Income Tax Ordinance 2021, introduced in the Finance Act of 2023, according to Muhammad Shahroz, an analyst at Insight Securities.
The developments unfolded on November 21, 2023, when the Federal Board of Revenue (FBR) issued a Statutory Regulatory Order (SRO) delineating the method for calculating windfall gains related to foreign currency dealings by banks. The taxation move comes on the heels of accusations by the former finance minister, asserting that banks manipulated exchange rates to earn substantial forex income during Calendar Year 2021 and 2022.
As per the SRO, windfall gains or profits arising from foreign exchange dealings during Tax Year 2022 and 2023 will be subject to a 40 percent tax rate. Additionally, the FBR has directed banks to deposit the tax payment by November 30, 2023, with the possibility of an extension by 15 days.
Analysts, including Muhammad Shahroz, have examined the potential impact of this tax on the listed banking sector, adhering to the methodology outlined in the SRO. Notably, concerns have been raised regarding the ambiguity surrounding whether the profits subject to taxation were earned through regular business activities or manipulation. The retrospective nature of the tax adds another layer of complexity to the situation.
Shahroz commented, “Banks may pursue a legal route against the imposition of this tax due to potential ambiguity surrounding whether profits were earned through regular business activities or via manipulation. Moreover, the tax is retrospective in nature.” This statement reflects the uncertainty prevailing among banking institutions, as they grapple with the implications of the newly introduced tax regime.
The contemplation of legal action by banks signals a potential showdown between financial institutions and tax authorities, with both sides likely to present their arguments regarding the legitimacy and fairness of the windfall tax. The outcome of such legal proceedings could have significant ramifications for the banking sector and may set a precedent for future taxation policies.
The retrospective nature of the tax has raised eyebrows within the business community, as it introduces challenges related to accountability and fairness. The banking sector, a critical component of the nation’s economic infrastructure, will be closely watched as it navigates the complexities of this tax imposition.
The banking sector in Pakistan is at the forefront of potential legal battles against the recently imposed windfall tax. As the industry evaluates the impact and implications of the taxation move, the resolution of this issue will likely shape the dynamics between financial institutions and regulatory bodies, influencing the broader landscape of fiscal policies in the country.
