The government is working to impose a tax on banks’ “windfall income” earned from speculative rupee-dollar exchange business in 2021 and 2022. With this tax, it is projected to collect Rs44 billion to reduce the likely shortfall in revenue receipts in the current fiscal year.
Financial experts, however, believe otherwise. They say the government has proposed the tax in talks with the International Monetary Fund (IMF) as a way to boost revenue collection, but it is a lengthy procedure and requires the federal cabinet’s nod.
They pointed out that bankers were influential people who had not yet let the government slap the tax, though the central bank had found in a study several months ago that about a dozen banks earned windfall profits in the years 2021 and 2022 because of speculative currency trading.
High officials of the State Bank of Pakistan (SBP) said in July 2023 they were still working with the government (the Ministry of Finance) on imposing the tax on windfall profits.
“We believe the probability of materialisation of this event (taxing windfall profits) is low,” said JS Global in brief comments.
Talking to The Express Tribune, Optimus Capital Management analyst Maaz Azam said the government had inserted a provision in the Finance Act 2023 to impose up to 50% tax on banks’ windfall income from currency exchange business, adding that latest reports emerging from the Pakistan-IMF talks also suggested that the government was considering imposing 40% tax on above-normal profits from foreign exchange business.
He, however, found it difficult that the proposal would have a smooth sailing. “I don’t see the government imposing 40-50% tax. It could be lower…likely around 30%, if it does so.”
Read: Banks may continue to make robust profit
Exchange Companies Association of Pakistan (ECAP) General Secretary Zafar Paracha said the other day banks were still involved in speculative currency exchange business to “mint extraordinary profit”.
The ongoing spell of rupee depreciation of around 4% in the past three weeks to a seven-week low below Rs288/$ was mainly due to the “banks’ speculative practices”, he said.
Banks have reported record high profits for the nine months ended September 30, 2023.
Azam was unsure whether or not banks would continue to do speculative currency trading in the future.
While he did not rule out the possibility of speculative currency exchange, he believes banks must have mended its practices considering the central bank’s warning about the windfall profits.
Besides, the interim government had recently launched a crackdown on currency smugglers and hoarders and remained vigilant to make sure the market functioned in line with demand and supply, he said.
Estimates of Optimus Capital Management show that banks recorded a windfall profit of over Rs110 billion in 2021 and 2022.
Data breakdown suggests that 19 banks listed at the Pakistan Stock Exchange (PSX) and six unlisted banks got extraordinary profits amounting to Rs97.4 billion and Rs12.7 billion, respectively, from currency exchange business over two years.
Published in The Express Tribune, November 15th, 2023.
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