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General, The Finance Act, 2023 introduced a new provision, Section (99D), in the Income Tax Ordinance 2001. Under this provision the Federal Government is empowered to levy a tax on any ‘windfall Income’ (WIT).

Under these provisions the Federal Government is entitled to determine the economic factors that may result in windfall income for a particular class of taxpayers. If there are such circumstances then an ‘additional tax’, over and above the normal tax, may be levied on the amount so determined as windfall income.

Nevertheless, a ceiling has been provided for the rate of tax at fifty (50) percent of the windfall income.

The law also envisages charge of windfall income tax for any of three preceding years.

WIT on banking companies

As a first case, through SRO 1588(I)/2023 dated November 21, 2023 WIT has been levied on income from foreign exchange of banking companies at the rate of forty (40) percent for the preceding two years ended on December 31, 2021 and 2022.

Contents of this note

This note describes the main features of the law relating to windfall income tax; the summary of notification issued in relation to windfall income tax levied on tax banking companies; and the apparent shortcomings in the notification.

Windfall tax under Section 99D of the Ordinance

Substantive provisions of WIT in the law are laid down in Section 99D as under:

99D. Additional tax on certain income, profits and gains.–

(1) Notwithstanding anything contained in this Ordinance or any other law for the time being in force, for any of the last three tax years preceding the tax year 2023 and onwards, in addition to any tax charged or chargeable, paid or payable under any of the provisions of this Ordinance, an additional tax shall be imposed on every person being a company who has any income, profit or gains that have arisen due to any economic factor or factors that resulted in windfall income, profits or gains.

(2) The Federal Government may, by notification in the official Gazette, –

(a) specify sector or sectors, for which this section applies;

(b) determine windfall income, profits or gains and economic factor or factors including but not limited to international price fluctuation having bearing on any commodity price in Pakistan or any sector of the economy or difference in income, profit or gains on account of foreign currency fluctuation;

(c) provide the rate not exceeding fifty percent of such income, profits or gains;

(d) provide for the scope, time and payment of tax payable under this section in such manner and with such conditions as may be specified in the notification; and

(e) exempt any person or classes of persons, any income or classes of income from the application of this section, subject to any conditions as may be specified in the notification.

(3) The Federal Government shall place before the National Assembly the notification issued under this section within ninety days of the issuance of such notification or by the 30th day of June of the financial year, whichever is earlier.

Levy of Tax only on the approval of National Assembly

A tax can only be levied under the sanction of the National Assembly of Pakistan. This aspect has been reasonably covered under subsection (3) of Section 99D of the Ordinance.

The mechanism provided in the law envisages that the Federal Government can determine the economic factors leading to the windfall tax, the period applicable and the rate prescribed. However, the said tax shall be payable only when the same is approved by the National Assembly.

The Federal Government is required to present the notification for the levy of windfall tax before the National Assembly within three months of the issue of the notification or June 30 whichever is earlier. Whatever may be the procedure tax can only be payable once the notification is approved by the National Assembly.

Notification 1588(I)/2023

In line with the requirements of subsection (2) of Section 99D the notification states that:

  1. Banking companies shall be the persons who are to be subjected to windfall income tax;

  2. A calculation has been included wherein foreign exchange income for banks has been identified as windfall income;

  3. The levy shall be applicable for preceding two years being Tax year 2022 and 2023 with a maximum prescribed rate of forty (40) percent.

This notification presupposes that fluctuations in the foreign exchange rates which could have resulted in extra profit for the banks are the economic factor which is covered under subsection (2) of Section (99D) of the Ordinance.

Premature recovery

The notification states that windfall income tax shall be payable by November 30, 2023. This does not tie with the manner of levy of tax as described above for the reason that the right to tax can only be invoked once the notification is approved by the National Assembly.

Furthermore, in this particular case, the National Assembly does not exist. Elections have been announced on a particular date in February 2024. In the present case it is not practically possible that this notification will be presented within ninety days of its issue (February 21, 2024) before the National Assembly.

These matters are to be examined by the Federal Government.


Section (99D) was introduced through the Finance Act, 2023. Through this notification WIT has been levied for the tax years 2021 and 2022 which are years prior to introduction of the whole scheme in the law.

There can be an argument with regards to retrospective application of the law for the tax years 2021 and 2022.

Retrospective application is a matter to be examined with reference to the right of the government to levy tax with retrospective effect, however, under the general scheme of things term ‘windfall tax’ is used to describe a one-off tax levied on companies deemed to have made unreasonably high profits, normally due to unusual favourable market factors. The government uses WIT tool to increase its revenue from sectors of the economy that have earned an unexpected windfall income and is applied retrospectively.

There are two main arguments in favour of windfall taxes:

By being retrospective and one-off – the amount due depends on things that have already happened, and is only levied once – windfall taxes should in theory be far less damaging to economic activity than other taxes. This is because companies cannot change behaviour to reduce their tax liability as they might with an annual tax announced in advance.

Windfall taxes are usually levied on persons judged to have benefited from something that was not the result of their own investment or hard work, but at the expense of wider society, so the tax provides a way of redistributing such gains.

There is also the concern that retrospective windfall taxes are unfair – that is, that persons should be told in advance what the tax rules are so they can decide how to behave, rather than a part of their legitimately earned income taken away.

Calculation of Windfall income under the notification

The windfall income for the years 2021 and 2022 on account of foreign exchange income is to be determined in a particular manner which has been illustrated in the notification.

A very simple method has been prescribed. Any excess of foreign exchange income over the average of income under the same head for the last five years is taken as windfall income.

For example, if the average of past years is Rs 10 and the income for the year 2021 is 15 then Rs 5 is treated as Windfall income subject to Section 99D of the Ordinance.

Inherent error in the manner of calculation

The right to levy WIT under subsection (1) of Section 99D of the Ordinance is not unconditional. Subsection (1) states as under:

on every person being a company who has any income, profit or gains that have arisen due to any economic factor or factors that resulted in windfall income, profits or gains.

The amount that can be taxed as windfall income can only be that which has arisen due to an economic factor. An increase in the exchange rate of rupee against USD has been taken as an economic factor giving rise to windfall income. However, instead of calculating the effect of the same on the income earned, the excess of income from foreign exchange earned over and above the average of the past five (5) years has been taken as the windfall income. This is not an entirely correct calculation in accordance with the requirements of the law.

An increase of foreign exchange income over the average of the last five years cannot be solely attributed to fluctuation in the exchange rate over the period. For example, it is obviously possible that a growing bank may have undertaken more activities in the foreign exchange than in the past years. The extra income may not be attributable solely to fluctuation in the exchange rate but on account of increase in volume.

The concept of averaging can only make sense when the income wholly relates to foreign exchange fluctuations and the volumes have remained the same. An example may be a legal requirement to keep certain deposits in foreign currency. The extra foreign exchange income in the years say 2021 to 2022 on account of revaluation of USD deposits against the average of the past year may be considered as windfall gain.

In this situation, the amount considered to be windfall income under the notification does not comply with the requirement as laid down in Section 99D of the Ordinance.

Perceptional windfall income in the banking sector in the past

In the recent past, it has been observed that certain banks have earned extraordinary profit under the head foreign exchange income on account of dealings in foreign currency. It is perceived, which may be correct, that certain banks procured foreign currency more than their committed requirement of foreign trade and other dealings from the inter-bank and other markets creating a shortage in the market and then selling the same at a higher price making windfall income in that spiral.

A windfall income arising on such activities definitely falls within the ambit of Section 99D of the Ordinance.

History of Windfall Income Tax in comparative jurisdictions.

In the UK the Conservative Government levied a windfall income tax in 1981. The comments of the then UK Finance Minister clarify the matter:

There was a genuine windfall element in that tax because interest rates had risen so high - at one point, they reached 17 percent. Banks were taking in deposits on which they were paying no interest and were earning interest, sometimes of more than 20 percent, on the loans that those deposits financed. We formulated a clear, simple measure specifying that the tax on banks should collect 2.5 percent of the value of those sterling deposits. The measure was clear and precise, it was introduced at the same time as the banks were making excess profits, and it was based on agreed statistics that had long been prepared and published before by the Bank of England.

The law made sense with reference to the concept of Windfall income. A tax was levied at the rate of 25 percent on the amount of interest free deposits. There could not have been any inequity as only those will be paying who were earning an excessive income. Present Pakistan regulation is however opaque in nature.


This requires:

1- There is the need to revise the calculation of windfall income on account of foreign exchange income for the banks for the years 2021 and 2022 as this does not comply with the requirements of subsection (1) of Section (99D) of the Ordinance at judicial forums.

2- The payment date can only be set after the approval of the notification by the National Assembly not being November 30, 2023.

Copyright Business Recorder, 2023


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