FILE PHOTO: An employee counts U.S. dollar bills at a money exchange in central Cairo, Egypt, March 20, 2019. REUTERS/Mohamed Abd El Ghany
The imposition of a 10-30 percent tax on the banking sector’s foreign exchange income will impact the profits of banks by 4-11 percent.
According to Topline Securities, if the government imposes an additional 10-30 percent tax on banks’ foreign exchange income then it could collect an additional Rs. 12-36 billion as the underlined income could touch Rs. 120 billion for the calendar year 2022.
Finance Minister Ishaq Dar in a recent press conference stated that the government is planning to impose a tax on banks’ foreign exchange income to ramp up tax revenues.
The government and the central bank have recently been very critical of the excessive gains made by banks due to currency volatility. Recently, State Bank of Pakistan (SBP) governor Jameel Ahmed informed National Standing Committee on Finance and Revenue that investigations against leading banks have been launched regarding the role of banks in exchange rate manipulation.
SBP has not yet penalized banks for excessive gains, however, a higher tax on the foreign exchange income of the bank is under consideration.
To recall, the foreign exchange income of listed banks as reported under the head of ‘foreign exchange income’ of bank’s P&L surged to Rs. 89 billion in 9M2022, which is up from just Rs. 32 billion in 9M21 and was much higher than its historical averages. It is important to note that due to falling FX reserves, PKR remained under severe pressure and weakened by 23 percent against US$ in 9M2022.
It peaked at Rs. 240 against US$ in the interbank market in July 2022 before settling at around Rs. 227-228. This extreme volatility may have resulted in high spreads charged by banks.
The report says that through this measure government will also try to partially bridge its tax revenue shortfall and appease the International Monetary Fund (IMF) which has been pressing for increased taxation measures.
To note, the Federal Board of Revenue (FBR) collected Rs. 740 billion in taxes in December against a target of Rs. 965 billion. If the government imposes an additional 10-30 percent tax on banks’ foreign exchange income then it could collect an additional Rs. 12-36 billion as we anticipate foreign exchange income from banks to clock in at around Rs. 120 billion in 2022.
Based on the analysis, if the government imposes an additional 10-30 percent tax rate on the foreign exchange income of banks (as reported in P&L) over and above the corporate tax rate, the 2022 profitability of the banking sector will be impacted by around 4-11 percent on average.