Karachi, November 25, 2023 – The caretaker government finds itself in a challenging situation following the recent announcement of a windfall tax on banks, as the amendment necessitates approval from the National Assembly.
The Federal Board of Revenue (FBR) recently implemented a 40 percent windfall tax on foreign exchange profits of banks through a Statutory Regulatory Order (SRO).
According to existing laws, the government must present the amendment before the National Assembly within 90 days of issuing the notification to validate the change. However, with general elections in Pakistan scheduled for February 11, 2024, even if a new government is formed promptly after the elections, approving the amendment by the deadline of February 19, 2024, poses a significant challenge.
Advocate Ashfaq Tola, an international tax law expert, notes that the federal government exercised its powers under Section 99D(2) of the Income Tax Ordinance 2021, issuing SRO1588(I)/2023 on November 21, 2023. This SRO specifies the method for calculating windfall income and the applicable tax rate of 40 percent.
As per section 99D(3) of the Income Tax Ordinance 2021, the federal government is obligated to present the notification before the National Assembly by February 19, 2024. However, given the expected timeline for the constitution of the National Assembly after the general elections, meeting this deadline appears challenging. Failure to gain approval by the specified date could render the notification invalid under section 99D(3) and Article 142 of the Constitution.
The windfall income is determined by the difference between the foreign exchange income of the subject year and the average foreign exchange incomes for the preceding six years, applicable to both tax years 2022 and 2023. Notably, for the tax year 2023, the windfall income of the tax year 2022 has been deducted from the sum of foreign exchange incomes of the preceding six tax years for the calculation of the average.
An additional point of contention that may lead to litigation is the retrospective application of Section 99D, potentially affecting past and closed transactions. This raises concerns, and individuals may refer to the judgment of the High Court of Sindh in 2011 PTD 1558 to challenge the retrospective nature of the provision.
The normal tax rate for banking companies stands at 39 percent for the tax year 2023 (compared to 35 percent for 2022), with an additional 10 percent super tax for the tax year 2023 (four percent for 2022). This implies a total tax of 89 percent on forex income for the tax year 2023 (79 percent for 2022). However, this figure does not account for administrative expenses, which may be 20-25 percent of income, potentially leading to litigation by affected parties, labeling it as virtually confiscatory taxation.
As the government grapples with the complexities of implementing the windfall tax, stakeholders remain vigilant for further developments, particularly in the context of the impending general elections and potential legal challenges to the proposed taxation measures.
