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A new Section 99D has been introduced in the Income Tax Ordinance 2001 (“ITO”) through the Finance Act 2023 (“FA 23”) that seeks to tax windfall income, profit and gains of companies due to any economic factor or factors that resulted in such windfall income, profit and gains.

Moreover, sub-section (2) of Section 99D empowers the Federal Government (“FG”) to issue a notification to determine windfall income, profit or gains, and economic factor(s) including but not limited to international price fluctuation having bearing on any commodity price in Pakistan or any sector of the economy in income, profit or gains on account of foreign currency fluctuation.

In the Finance Bill 2023, this tax was proposed to be levied on every person. However, in the FA 23 it has been restricted to only companies. Moreover, even though the Federal Board of Revenue (FBR) has been empowered to notify the sectors on which this section will apply to, corresponding amendments have been made in the Fourth Schedule (Insurance), Fifth Schedule (Exploration and production of petroleum, and exploration and extraction of mineral deposits), and the Seventh Schedule (Banking Companies).

However, it is surprising that even though Section 99D itself is restricted to only companies, there has been a corresponding amendment in the Fifth Schedule (Exploration and production of petroleum, and exploration and extraction of mineral deposits), through which provisions of Section 99D have been made applicable to the taxpayers under the Fifth Schedule. Interestingly, the Fifth Schedule applies to any person and not just to companies.

Therein lies a potential inherent contradiction in the application of Section 99D itself. This corresponding amendment should have read “companies” instead of “taxpayers” in order to remain within the scheme of Section 99D itself.

Moreover, the FG has been empowered to prescribe vide a notification in the Official Gazette, inter-alia, sectors on which Section 99D will be applicable, determine windfall income, and economic factors, provide for scope, payment and time of tax payable under Section 99D.

The said notification is supposed to be placed before the National Assembly within 90 days of its issuance or by 30th June of the Financial Year, whichever is earlier. However, a better and more appropriate way would have been to get approval from the National Assembly and then issue the said notification. As this mitigates any uncertainty and ambiguity that can arise should the National Assembly refuse to approve the notification tabled by the FG before it.

With that being said, it may be that similar to the major tax measures introduced last year (Super tax, deemed income and the Capital Value tax), this windfall tax is likely to be challenged before the concerned High Courts by the aggrieved taxpayers.

First, let’s discuss what windfall taxes are. Windfall is defined in the Black’s Law Dictionary (10th Edition) (“Black’s Law dictionary”) as “an unanticipated benefit, usually. In the form of a profit and not caused by the recipient”.

Moreover, wind-fall profits tax, is defined in the Black’s Law dictionary as “A tax imposed on a business or industry as a result of a sudden increase in profits”. Although there is ample history of windfall taxes being levied in various countries, however, in this article some recent examples of windfall taxes levied in other jurisdictions are discussed.

The United Kingdom introduced a windfall tax on the profits of oil and gas companies on 14th July 2022, through the Energy (Oil and Gas) Profits Levy Act 2022 (“EPLA”), earned from 26th May 2022 till 31st March 2028. The windfall tax rate is set at 35% for now. It is pertinent to note that oil and gas companies that do business in the UK continental shelf are already taxed at 40%.

The said windfall tax is in addition to this 40%, making the overall tax rate a whopping 75%. This windfall tax on profits of oil and gas companies has been levied as the European and the UK wholesale gas prices were at a record high during 2022, and are expected to remain really high in the coming years. This is driven by global circumstances, including growing demand for energy post Covid-19 and the Russia-Ukraine war.

Due to these circumstances, the HMRC has stated in its policy paper on the said windfall tax published on 21 November 2022 that “Oil and gas producers are making extraordinary profits and this is expected to continue.

In response, the government is raising the rate of the levy from 25% to 35%, bringing the headline tax rate for the sector to 75%, and extending the duration of the levy. This ensures oil and gas companies that will benefit from the prolonged period of increased prices continue to pay their fair share of tax.”

In addition, the UK has also proposed a temporary levy to tax excess profits of electricity generators in the UK. The final draft of this levy has been published along with the Spring Finance Bill 2023. This windfall tax is proposed to be levied at 45% on exceptional receipts of the electricity generators. Exceptional receipts are proposed to be defined as those receipts in excess of the benchmark price of £75 Megawatt per hour, adjusted in line with the Consumer Price Index.

Moreover, the excess profits tax is limited to companies with electricity output of more than 50 gigawatt hours, and where the exceptional receipts exceed £10 million per year. This excess profits tax is proposed to be levied on electricity generators as because electricity prices have risen, many UK generators of electricity have earned significantly increased revenues for their power, as for structural reasons, the price of electricity is tied to the price of natural gas. The electricity generators that have realised revenues well in excess of normal commercial returns the Electricity Generator Levy will apply to.

Moreover, in India, a windfall tax has been levied through imposing customs duty/cess on the energy sector; petroleum crude (domestic production), petrol (exports), diesel (exports), and aviation turbine Fuel (exports).

The duty is a fixed tax/duty imposed on the aforesaid. In response to a question raised by Shri Pasunoori Dayakar and Dr. G. Ranith Reddy, in the Lok Sabha on 8th August 2022, Shrimati Nirmala Sitharaman on August 8, 2022, Minister of Finance (“FM”), India, stated that “domestic producers of petroleum crude like ONGC sell their crude at international parity price.

As international crude prices rose sharply, these crude producers were making super normal profits. The prices of diesel, petrol and ATF rose even more sharply, which led to extraordinary cracking margins (difference between the product price and the crude price) on exports of these products.

The cess/duties were imposed in this background”. This statement underlines the economic rationale behind imposing the said windfall tax/duty on these commodities.

If we compare the design of the windfall tax in the UK to that of Pakistan, it is clear that the windfall tax in Pakistan is intended to be broader than the windfall tax in the UK, as one of the economic factors included in Pakistan impost includes currency fluctuation. However, windfall income, profit and gains have not been defined in the Income Tax Ordinance (ITO), the FG has been empowered to define it through a notification.

The UK windfall tax is clearly applicable on the income of the corporations which are within the purview of their ringfence corporate tax regime (a special regime for taxing the energy companies in the UK tax law).

Moreover, as stated earlier, the Pakistani windfall tax applies to those companies which have earned a windfall gain, income, and profit due to currency fluctuation. Currently, Banks will be affected by this tax as they may have reported windfall profits on account of currency fluctuation. However, the currency exchange companies have been left out for now, even though they may have made windfall profits on account of currency fluctuation as well.

(To be continued on Monday)

Copyright Business Recorder, 2023

M. Amayed Ashfaq Tola

The writer is an LLM in International Tax Law and an Advocate of the High Court


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