Expert says EPT on windfall profits tantamount to double taxation

ISLAMABAD: The Excess Profit Tax (EPT) or additional tax on companies making windfall profits is against the basic principle of income tax that the same income cannot be taxed twice in the hands of the same person.

Dr Muhammad Iqbal, former Member Inland Revenue (Policy) Federal Board of Revenue (FBR), told Business Recorder that one of the most significant changes brought about through the recently promulgated Finance Act, 2023 was the insertion of Section 99D in the Income Tax Ordinance, 2001.

This section titled as “Additional tax on certain income, profits and gains” imposes a tax that may extend up to 50% of the income of companies who have derived income, profit or gain due to any economic factor or factors that resulted in windfall income, profits or gains.

This tax will be payable in addition to the normal corporate tax as is obvious from the nomenclature used and will be applicable retrospectively from Tax year 2020 onwards without any cut-off date. The detailed modalities of this new tax have not been given and the federal Government has been authorized to specify the sectors to which this tax will apply, the mode of computation of windfall profits and to specify the mode and manner of payment.

Dr Iqbal said that the most critical issue is that the tax under section 99D will be in addition to the normal corporate income tax, i.e., the same income will be subjected to corporate income tax and the newly introduced Additional tax. It is the basic principle of income tax that the same income cannot be taxed twice in the hands of the same person.

The section 99D has breached this cardinal principle. Even the Excess Profits Tax Act of 1940 tried to avoid this pitfall by allowing the amount of EPT payable as a deduction for computing the income chargeable to corporate tax under the Income Tax Act of 1922.

A simple solution would have been to exempt corporate tax on the amount chargeable to Additional tax under section 99D and subject it to a higher rate that would yield the combined amount of corporate tax, as well as, the additional tax that is presently sought to be charged.

The rate of tax is a policy choice and even a rate of 80% on excess profits would have been acceptable, but it would have avoided the element of double taxation that could lead to serious legal challenges. The choice of name of the new tax also underscores the existence of the element of double taxation.

The section 99D imposes additional tax on any income, profit or gains that have arisen due to any economic factor or factors that resulted in windfall income, profits or gains but it does not specify which income, profits or gains will be subjected to this tax.

Will it be the taxable or total income, declared or assessed or amended income, profits or gains on which this tax will be payable? What will be the impact of changes in income after appeals, revision, rectification, etc.? The answers to these questions may appear to be intuitive to the framers of 99D but there can be many controversies around these, Dr Iqbal said.

Former Member Policy stated that the new section doesn’t incorporate any anti-avoidance provisions to prevent abuse and revenue leakages.

It is expected that the government will reassess and revamp the tax policy and administrative issues required for effective implementation to make EPT a success story. It may be worthwhile to consider, omitting section 99D from the Income Tax Ordinance, 2001 and enacting a separate and self-contained law for imposition of EPT after carefully debating its scope and design in view of the global experiences. The issues should not be addressed through the notification to be issued by the Federal Government, in view of the limited scope of subordinate legislative, Dr Iqbal added.

Copyright Business Recorder, 2023