EDITORIAL: Windfall tax is defined as “a tax levied on an unforeseen or unexpectedly large profit, especially one regarded to be excessive or unfairly obtained. The government has imposed windfall tax on banks for their supposed windfall income earned on foreign exchange dealings.
This decision was perhaps taken when the PDM (Pakistan Democratic Movement) government was in power prior to the arrival of the current interim setup in the country as the then finance minister had categorically told the business community in a meeting that the government would impose 90 percent tax on windfall gains by banks of Rs 100 billion on foreign exchange transactions.
Windfall tax on banks’ foreign exchange earnings is effectively 90 percent as the effective income tax, along with super tax, on banks is 50 percent and now 40 percent tax is being imposed on windfall earnings computed at Rs 110 billion in the last two years (CY21 and CY22).
The windfall tax is a blunt tool, and such taxes are usually misused. This is no exception. The problem is that the government is short of revenues, and it is only finding sectors within the tax net to boost its revenues.
There are businesses and individuals that have made exceptionally high windfall returns in the real estate market; but the sector’s income has never been properly taxed, let alone its windfall earnings.
In the retail and wholesale segment, dealers and wholesalers have made killing returns in the last year or so; but the government is still struggling to impose a normal income tax regime on them.
Look at the retail prices of Urea versus ex-factory prices, there some middlemen are making windfalls. So is the case with sugar and other commodities. But there are no signs of any tax on them.
Banking is a formal business, and the government is squeezing formal businesses and individual incomes to the teeth, while there is no consideration of taxing those who are outside the net. The higher return on foreign exchange income by banks is due to the higher risk they carry on foreign transactions.
The market is thin, and the outflows are outpacing the inflows, which is resulting in the depreciation of the country’s currency. That is why the spreads are high; if the market has more volumes, the spread becomes low and the banks make less income on foreign exchange transactions or dealings.
Banks are possibly not quite so innocent. Not all the dealings and income is kosher, so to speak. Banks chose to have a model where they invest heavily in government securities and attempt to raise as many deposits as they can on zero-priced current accounts. They mis-sell current accounts as Islamic to less-informed consumers. Meanwhile, almost all banks were involved in dubious bancassurance products.
However, one cannot blame bank treasurers for making money as they are mandated to make money for their shareholders. And they do so on high risk segments. Now they may find other avenues to do so. This tax is likely to be challenged in court, as its application is in retrospect.
It is also difficult to prove that banks have manipulated the market. By this token, all the big brokers on Pakistan Stock Exchange should also pay windfall taxes as they manipulate the market for breakfast. And the list of masters of manipulation goes on and on.
Copyright Business Recorder, 2023
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