Pakistan: Tax on Windfall Income

A windfall tax is a type of tax imposed on unexpected, often large, financial gains or profits that are not a result of regular business activities. These gains are considered windfalls because they are unforeseen and arise from external factors rather than the company's usual operations. Windfall taxes are typically levied on specific industries or companies that experience sudden and significant increases in their profits due to external factors such as changes in commodity prices, regulatory changes, or other extraordinary events.

Through the Finance Act 2023, section 99D was inserted in the Income Tax Ordinance 2001 (the Ordinance). Section 99D of the Ordinance imposes an additional tax on companies operating in designated sectors. This additional tax cannot surpass 50% of the windfall income, profit, or gains derived from economic factors during any of the three years preceding the tax year 2023 and onward. The Federal Government through notification in the official gazette specify the method and criteria for determining the windfall income and gains.

Two separate formulas have been provided to compute windfall income for CY 2021 & CY 2022(I.e. corresponding to tax years 2022 and 2023 respectively). Windfall Income, profits, and gains for CY 2021 (TY *2022): = (FX gain for CY 2021 as disclosed in the Financial Statement - FX gain for CY 2015 to CY 2020) /6. Windfall Income, profits, and gains for CY 2022 (TY *2023): = (FX gain for CY 2022 as disclosed in the Financial Statement - FX gain for CY 2016 to CY 2021)/6.

If windfall income for CY 2021 is negative, the value of said windfall income shall be taken as zero, for the purpose of computation of Income for CY 2022. For the purpose of computation Income for CY 2021, where loss has been disclosed under the head of foreign exchange income in any calendar year, such amount of loss shall be excluded from the computation along with exclusion of number of year(s), as used in the denominator of above formula.

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