Karachi, February 22, 2024 – The imposition of a windfall tax on the additional income of banks has become null and void as it failed to secure approval from the national assembly, according to sources.
The Federal Board of Revenue (FBR) had, on November 21, 2023, issued SRO 1588(I)/2023 to implement the windfall tax on the additional income accrued by banking companies during a fiscal year. This move was executed under Section 99D of the Income Tax Ordinance, 2001, which explicitly stipulates that the federal government must present the notification before the National Assembly within ninety days of issuance or by the 30th day of June of the financial year, whichever comes earlier.
Insiders in the FBR revealed that when the SRO was announced, the authorities were optimistic that the general elections, scheduled for February 8, 2023, would lead to the formation of a new government, and the notification would receive approval from the national assembly. However, despite the elections taking place, the formation of a new government is still pending.
Earlier, an international tax law firm highlighted that the federal government, exercising its powers under Section 99D(2) of the Income Tax Ordinance 2021, issued SRO1588(I)/2023 on November 21, 2023. This SRO outlined the methodology for calculating windfall income and specified a tax rate of 40 percent.
Section 99D(3) of the Income Tax Ordinance 2021 mandates that the federal government present the notification before the National Assembly by February 19, 2024. The expected timeline for the constitution of the National Assembly after the general elections, however, makes meeting this deadline a challenging task. Failure to secure approval by the specified date could render the notification invalid, in accordance with Section 99D(3) and Article 142 of the Constitution.
The calculation of windfall income involves determining the variance between the foreign exchange income of the subject year and the average foreign exchange incomes for the preceding six years. This methodology is applicable to both tax years 2022 and 2023. Notably, for the tax year 2023, the windfall income of the tax year 2022 is deducted from the sum of foreign exchange incomes of the preceding six tax years to calculate the average.
This turn of events has left banking entities in a state of uncertainty, as the proposed windfall tax now faces an uncertain fate. The delay in the formation of the new government and subsequent legislative approval has brought into question the viability of the tax measures outlined in SRO 1588(I)/2023. It remains to be seen how this development will impact the financial landscape and whether alternative measures will be introduced to address the concerns initially targeted by the windfall tax on banks.
