Govt has approved the imposition of 40% tax on banks’ foreign exchange earnings

In a recent development, the Federal Cabinet has approved the imposition of 40% tax on banks’ foreign exchange earnings of the years 2021 and 2022.

This decision was made in the light of a new Section 99D introduced in the Finance Act of 2023. This section specifically targets the taxation of profits classified as windfall gains.

The imposition of this windfall tax is anticipated to have a varying impact on the EPS of the banks. According to our projections for CY23E, the expected negative impact (on AHL’s coverage banks) on EPS ranges from 3% to 18%. We have detailed these estimates in the table.

Impact on govt’s revenue collection: With the implementation of this one-off tax, to gauge its potential impact on government’s tax revenue collection, we have computed the tax implications for KSE100 banks during CY21 and CY22. It is observed that in CY21, banks collectively registered an FX income amounting to PKR 49bn. In the subsequent year, CY22, this FX gain surged to PKR 96bn, indicating a substantial YoY growth of 95%. However, with the introduction of this one-off tax, the government is projected to amass a total tax revenue of approximately PKR 58bn. This calculation includes a 40% tax on the FX income earned in both CY21 and CY22. The substantial tax revenue generated from this measure is expected to play a pivotal role in aiding the government in achieving its revenue target for FY24.

Courtesy- AHL Research


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