The government’s plan to impose a tax on banks’ foreign exchange income could impact the profitability of the banking sector by around 4-11%, said Topline Securities in a report on Thursday.
The development comes after Federal Minister for Finance and Revenue Ishaq Dar on Wednesday said the government is planning to impose a tax on banks’ foreign exchange income to ramp up revenues.
Topline’s report stated that the foreign exchange income of listed banks as reported under the head of ‘foreign exchange income’ of P&L (Profit and Loss) surged to Rs89 billion in 9M2022, a massive increase in comparison to just Rs32 billion recorded in 9M2021, and was much higher than its historical averages.
“Based on our analysis, if the government imposes an additional 10-30% tax rate on foreign exchange income of banks (as reported in the P&L) over and above the corporate tax rate, 2022 profitability of the banking sector will be impacted by around 4-11% on average,” said the report.
Pakistan is currently struggling with dwindling foreign exchange reserves, and remains in talks to revive the stalled International Monetary Fund (IMF) programme, which is deemed crucial by economic experts.
On the other hand, the government and the central bank have recently expressed serious concern over the excessive gains made by banks due to currency volatility.
In December, SBP Governor Jameel Ahmed informed the National Standing Committee on Finance and Revenue that investigations against leading banks have been launched regarding the role of banks in exchange rate manipulation.
Moreover, the committee was informed that volatility of the dollar exchange rate is also due to smuggling and assisting Afghanistan in its imports.
The SBP has not yet finalised its probe into alleged exchange-rate manipulation. However, in November, the SBP expanded its scope of investigation beyond eight banks. At the time, SBP Governor Jameel Ahmad said the inspection team was working towards the end of the month as its deadline.
Now, the government is mulling taxing the FX gains.
“We believe that through this measure the government will also try to partially bridge its tax revenue shortfall and appease the IMF that has been pressing for increased taxation measures,” said the brokerage house on Thursday.
“If 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,” it added.
It is important to note that due to falling FX reserves, PKR has remained under severe pressure and depreciated 22% against USD in 2022.
“This extreme volatility may have resulted in high spreads charged by banks,” the report said.
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