The banking industry will be subject to an additional 40% tax in 2021 and 2022 on their windfall revenue from foreign currency transactions, according to a new tax proposal announced by the Federal Board of Revenue (FBR).
Banks To Pay Extra 40% Tax To FBR on Windfall Income
However, the financial businesses will be required to pay an additional tax on the excess profits from foreign exchange operations, above and beyond the average earnings of the previous six years, according to a S.R.O. 1588 (l)/ 2023 issued by the FBR on Wednesday.
In addition, the FBR has made it clear that this tax policy is compliant with section 99D of the revenue Tax Ordinance, which gives the federal government the authority to impose additional taxes on any industry that has seen gains or windfall revenue because of unusual market conditions or for any other reason.
Furthermore, November 30, 2023, or within 15 days of the commissioner extending the deadline upon the taxpayer’s written request, is when the additional tax must be paid.
Earnings, Gains and Windfall Income Calculation Criteria
Furthermore, in the announcement, an explanation of how earnings, gains, and windfall income are calculated provided by FBR.
However, to pay the extra tax, banks can use electronic payment receipt or a designated challan to the federal treasury.
According to the FBR, the purpose of this tax legislation is to ensure that income is distributed fairly and to lessen income gaps across the nation.
However, the notification states that the amount by which the income, profits, and gains from foreign exchange dealings for the calendar year 2021 or 2022, as the case may be, exceed the average income, profits, and gains from such dealings for the six calendar years prior, is what constitutes a banking company’s windfall income, profits, and gains from foreign exchange dealings.
Calculation Formula
The formula for determining the average income, profits, and gains from foreign exchange dealings has also been supplied in the notification.
This formula is the product of the income, profits, and gains from foreign exchange dealings for the six calendar years prior divided by six.
Two examples of how the tax measure is applied are provided in the notification.
In the first scenario, a financial company made Rs. 100 million in foreign exchange profits in 2021, compared to an average of Rs. 50 million over the previous six years.
For 2021, it will therefore have Rs. 50 million in windfall income, profits, and gains from foreign exchange dealings. Its increased tax due will be Rs. 20 million, or 40% of Rs. 50 million.
In the second example, a banking company’s revenue from foreign currency transactions was Rs. 150 million in 2022, compared to an average of Rs. 75 million for the previous six years.
Consequently, for 2022, its profits and gains from foreign exchange dealings, along with windfall income, total Rs. 75 million. Its additional tax liability, or 40% of the total, is Rs. 30 million.
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