Banks to Contribute Rs 58 Billion in Windfall Tax Boosting Government Revenue

Banks to Contribute Rs 58 Billion in Windfall Tax Boosting Government Revenue

Karachi, November 16, 2023 – Banks in Pakistan are set to pay an additional Rs 58 billion in income tax following the federal cabinet’s approval of a 40 percent tax on windfall profits derived from foreign exchange transactions in 2021 and 2022.

 This development, spurred by the introduction of Section 99D in the Finance Act of 2023, is projected to significantly impact banks’ earnings per share (EPS), according to analysts at Arif Habib Limited.

The new taxation measure specifically targets windfall gains, and its implementation is expected to result in varying degrees of impact on the EPS of banks. Projections for the calendar year 2023 indicate an anticipated negative impact ranging from 3 percent to 18 percent.

Analyzing the tax implications for KSE-100 banks during CY21 and CY22, it was observed that banks collectively recorded a foreign exchange income of Rs 49 billion in CY21. This figure surged to Rs 96 billion in CY22, representing a substantial year-on-year growth of 95 percent.

However, the imposition of the one-off tax is poised to generate approximately Rs 58 billion in total tax revenue for the government. This calculation includes a 40 percent tax on the foreign exchange income earned by banks in both CY21 and CY22. The windfall tax is expected to play a crucial role in aiding the government in achieving its revenue target for the fiscal year 2023-24.

The government’s move to tap into windfall profits from foreign exchange transactions is seen as a strategic measure to bolster public finances and ensure sustainable revenue streams. Analysts believe that this tax could be instrumental in supporting the country’s fiscal policies and addressing economic challenges.

This development comes at a time when governments worldwide are exploring innovative approaches to enhance revenue collection and ensure financial stability. The banking sector’s compliance with this windfall tax is expected to contribute significantly to the government’s broader economic agenda.