The government is considering levying more taxes on financial institutions.
According to a researcher, the government may be able to earn an additional Rs12-36 billion by taxing the foreign exchange income of banks.
KARACHI: Instead of ordering the central bank to take administrative action to reduce the abnormal volatility, the government is considering taxing the banks’ windfall profits resulting from the high volatility in the rupee-to-dollar exchange rate.
According to Umair Naseer, Director of Research at Topline Securities, the foreign exchange income of banks listed on the Pakistan Stock Exchange (PSX) increased by almost three times to Rs89 billion in the first nine months of 2022 from Rs32 billion in the same period the previous year.
According to him, the income growth was significantly greater than usual historically.
Naseer thinks that by enacting taxes, the government will also attempt to partially make up for its lack of tax revenue and placate the IMF, which has been pushing for stronger taxation measures.
The government intends to impose this new tax in an effort to make up for relatively poor revenue collection in comparison to the Rs7.4 trillion target set with the International Monetary Fund (IMF) for the current fiscal year 2023.
He added, “If the government levies an additional 10-30% tax on banks’ foreign exchange gain, it may raise an additional Rs12-36 billion, as we predict banks’ foreign exchange income to total around Rs120 billion in 2022.
“Banks charged much higher charges from clients (i.e., importers, exporters, and beneficiaries of workers’ remittances) on the exchange of dollars (and other foreign currencies) into rupees and vice versa,” a former banker who spoke on the condition of anonymity.
Banks routinely charge their customers a greater price than what is typical in the interbank market. However, they charged a “abnormally high price” in the nine-month (9M2022), which compounded their foreign exchange gains.
It is significant to note that the rupee has continued to face tremendous pressure and has depreciated by 23% against the US dollar in 9M2022. This has occurred as a result of the declining foreign exchange (FX) reserves. In the interbank market, the exchange rate peaked in July 2022 at Rs240 to the US dollar before falling to about Rs227–228. “Bank spreads may have been large as a result of this extraordinary volatility.”
The banker claimed, “Since each deal is reported to the central bank, it was known to the central bank and the government that banks were charging abnormally high costs from their clients.” The fact that this unusual rupee-dollar conversion rate was charged “become a cause of depreciation in the rupee in 2022,” which is more relevant.
Economist Sana Tawfik of Arif Habib Limited stated, “Instead of taxing foreign exchange revenue, the government could improve its control and vigilance on the rupee-dollar exchange rate to fix the problem. The banking industry is already subject to high taxes.
