Govt mulls imposing taxes on banks

Researcher says govt could collect additional Rs12-36b with tax on banks’ FX income

KARACHI:

The government is considering imposing taxes on the windfall income earned by banks, from the high volatility in the rupee-dollar exchange rate, instead of directing the central bank to control the abnormal volatility through administrative measures.

The foreign exchange income of banks listed at the Pakistan Stock Exchange (PSX) jumped almost three-folds to Rs89 billion in the first nine-month of 2022, compared to Rs32 billion in the same period of the last year, said Umair Naseer, Director of Research at Topline Securities.

“(The growth in the income) was much higher than its historical averages,” he said.

Naseer believes that through this measure (of imposing taxes), the government will also try to partially bridge its tax revenue shortfall and appease the IMF which has been pressing for increased taxation measures.

As tax collection remained comparatively low, against the Rs7.4 trillion target agreed with the International Monetary Fund (IMF) for the ongoing fiscal year 2023, the government hopes to bridge the shortfall by imposing this new tax.

“If the government imposes an additional 10-30% tax on banks’ foreign exchange income then it could collect an additional Rs12-36 billion as we anticipate foreign exchange income from banks to clock in at around Rs120 billion in 2022,” he said.

A former banker, who spoke on the condition of anonymity, said, “Banks charged significantly higher prices from clients (i.e., importers, exporters and recipients of workers’ remittances) on the exchange of dollars (and other foreign currencies) into rupees and vice-versa.”

As business practice, banks charge their clients a price higher than that prevailing in the inter-bank market. In the nine-month (9M2022), however, they charged an “abnormally high price” which multiplied their foreign exchange gains.

It is important to note that due to the falling foreign exchange (FX) reserves, the rupee has remained under severe pressure and weakened by 23% against the US dollar in 9M2022. The currency peaked at Rs240 against the US dollar in the inter-bank market in July 2022 before settling at around Rs227-228. “This extreme volatility may have resulted in high spreads charged by banks.”

The banker said, “It was in the knowledge of the central bank and the government that banks were charging abnormally high prices from their clients, as each deal is reported to the central bank.” More importantly, the charging of this abnormal rupee-dollar exchange rate “itself became a cause of depreciation in the rupee in 2022.”

Arif Habib Limited’s Economist Sana Tawfik said, “The government should increase its monitoring and vigilance on the rupee-dollar exchange rate to fix the problem instead of taxing the foreign exchange income. The banking sector is already heavily taxed.”

She added that overtaxing will discourage banks from performing their due duties.

Published in The Express Tribune, January 6^th, 2023.

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