The government had asked banks to submit a 40% windfall tax on forex transactions to the national exchequer
- Sardar Ejaz Ishaq Khan of IHC passes order.
- The government taxed the banks at 40% on the windfall.
- Several analysts are calling it a “non-starter.”
ISLAMABAD: The Islamabad High Court (IHC) has issued a stay order on the government’s decision to collect windfall taxes from banks earned through foreign exchange trading, a move that analysts had termed detrimental to the industry.
Windfall, in the case of commercial banks, is the income received by banks due to a sudden decrease or sudden increase in the value of the Pakistan Rupee against the dollar called a windfall, according to The newswith several analysts calling it a “non-starter”.
IHC judge Sardar Ejaz Ishaq Khan passed the three-page order on a petition filed by a private bank against the caretaker government’s move – aimed at generating revenue as the economy struggles to stay afloat. Banks were asked to deposit the amount to the national treasury by November 30.
“The previous submissions […] establish not only a prima facie case but also that the ingredients of the balance of convenience and irreparable loss work in petitioner’s favor. Accordingly, the operation of the impugned SRO shall remain suspended till the next date of hearing.”
Under rules issued by the caretaker government last week, banks will now have to pay a 40% tax on windfall income from foreign exchange transactions over the past two years.
The government’s decision, announced on Wednesday, was taken to widen its revenue base and punish lenders involved in massive currency speculation.
Under subsection (2) of section 99D of the Income Tax Ordinance 2001, the government has decided to tax the windfall profits of banks for the years 2021 and 2022, based on a specific tax rate specified in the statutory regulatory order (SRO) which issued by the Federal Board of Revenue (FBR).
Analysts at Optimums Research estimated that banks’ forex trading in 2021 and 2022 generated a windfall of Rs 87.948 billion. About Rs 35.18 billion in taxes will be collected from the banks during these two years.
The Pakistani rupee’s extreme volatility and record lows against the US dollar last year led authorities to suspect manipulation by banks and exchange firms.
The country’s currency crisis had created high volatility in the local currency, which resulted in large windfalls for banks as lenders engaged in currency speculation.
In June, the PDM-led government had imposed an “additional tax” at a rate not exceeding 50% on income earnings and profits. The FBR, through the Finance Bill 2023, included a new section “99D” (Additional tax on certain income, profits and gains) in the Income Tax Ordinance, 2001.
The IHC noted that Section 99D appears “independent” as it does not specify the consequences of the National Assembly’s disagreement with the “federal government’s calculation of windfall income or the selected rate of additional tax and the benefit of ambiguity The precarious existence of the descendants of a charge section can only be extended to the taxpayer’.
“Therefore, the SRO can only be deemed to remain pending until it is blessed by the National Assembly (assuming all other legal grounds work in the department’s favor thereafter),” he added.
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