Excess Profit Tax in Pakistan: Double Taxation or Fair Share?

ISLAMABAD: The recently introduced Excess Profit Tax (EPT), also referred to as an additional tax on windfall profits, has sparked an intense debate in Pakistan’s tax and corporate circles. Critics argue that the tax, brought in through the Finance Act 2023 under Section 99D of the Income Tax Ordinance 2001, breaches one of the cardinal principles of taxation: the same income cannot be taxed twice in the hands of the same person.

What is Section 99D?

Section 99D, titled “Additional tax on certain income, profits and gains”, empowers the government to impose a tax of up to 50% on companies that earn income, profits, or gains due to unforeseen “economic factors” leading to windfall earnings.

This new tax is:

• In addition to normal corporate tax, not a replacement.

• Retrospective, applicable from Tax Year 2020 onwards.

• Open-ended, with the federal government authorized to:

  • Specify the sectors to which this tax applies.

  • Determine how windfall profits will be computed.

  • Lay down the manner of its payment.

Concerns Raised

Dr. Muhammad Iqbal, former Member Inland Revenue (Policy) at the Federal Board of Revenue (FBR), notes that Section 99D represents a departure from long-established taxation principles.

1. Double Taxation Risk

   • Companies already pay corporate income tax on their earnings.

   • The same earnings will now face an additional levy under Section 99D.

   • In contrast, the Excess Profits Tax Act of 1940 avoided this issue by allowing EPT as a deductible expense for computing corporate tax under the Income Tax Act of 1922.

2. Legal Vulnerability

   • Subjecting the same income to two taxes could invite serious legal challenges.

   • A more balanced approach would have been to exempt corporate tax on income chargeable to additional tax and apply a higher single rate instead.

3. Unclear Scope

   • The law does not specify whether EPT will be charged on taxable income, declared income, or assessed income.

   • Questions remain about the treatment of income after appeals, revisions, or rectifications.

   • The absence of anti-avoidance provisions raises the risk of abuse and revenue leakages.

Policy Alternatives

Dr. Iqbal suggests that a more effective approach would have been to:

• Set a higher tax rate (even up to 80%) on excess profits while avoiding double taxation.

• Frame a separate, self-contained law for EPT after thorough debate and consideration of international experiences.

• Avoid relying solely on government notifications for clarifying scope, since subordinate legislation has inherent limitations.

The Road Ahead

The government now faces a critical decision: whether to proceed with Section 99D in its current form or reassess and redesign EPT to make it effective, enforceable, and legally sound. If left unaddressed, the ambiguities and risks of double taxation could undermine investor confidence, complicate compliance, and stall economic growth.

For Pakistan’s fragile economy, the challenge is clear—tax windfall profits without violating foundational principles of fairness, clarity, and legality in taxation