FBR gives Nov 30 deadline to banks for paying 40% extra tax on windfall income

The Federal Board of Revenue (FBR) has notified a new tax measure to collect a 40 percent additional tax from the banking sector on their windfall income from foreign currency transactions in 2021 and 2022.

The FBR issued an S.R.O.1588 (l)/ 2023 on Wednesday, specifying that the banking companies will have to pay the additional tax on the excess income from foreign exchange dealings, over and above the average earnings of the past six years.

The FBR has also clarified that this tax measure is in accordance with section 99D of the Income Tax Ordinance, which empowers the federal government to levy additional tax on any sector that has earned windfall income, profits or gains due to abnormal market conditions or any other reason.

The deadline for the payment of the additional tax is November 30, 2023, or within 15 days of extension granted by the commissioner on written request by the taxpayer.

The FBR has explained the method of computing the windfall income, profits and gains in the notification. The additional tax will be deposited in the federal treasury through a prescribed challan or computerized payment receipt.

The FBR has said that this tax measure is aimed at ensuring equitable distribution of income and reducing income disparities in the country.

According to the notification, the windfall income, profits and gains of a banking company from foreign exchange dealings shall be the amount by which the income, profits and gains from such dealings for the calendar year 2021 or 2022, as the case may be, exceed the average income, profits and gains from such dealings for the six preceding calendar years.

The notification has also provided the formula for calculating the average income, profits and gains from foreign exchange dealings, which is the sum of the income, profits and gains from such dealings for the six preceding calendar years divided by six.

The notification has given two examples to illustrate the application of the tax measure. In the first example, a banking company has earned Rs. 100 million from foreign exchange dealings in 2021, while its average income from such dealings for the past six years was Rs. 50 million. Therefore, its windfall income, profits and gains from foreign exchange dealings for 2021 is Rs. 50 million, and its additional tax liability is Rs. 20 million, which is 40 percent of Rs. 50 million.

In the second example, a banking company has earned Rs. 150 million from foreign exchange dealings in 2022, while its average income from such dealings for the past six years was Rs. 75 million. Therefore, its windfall income, profits and gains from foreign exchange dealings for 2022 is Rs. 75 million, and its additional tax liability is Rs. 30 million, which is 40 percent of Rs. 75 million.