Rupee weakens as banks face forex tax, importers buy dollars

KARACHI: The rupee weakened on Thursday, snapping a five-day winning streak, as importers bought more dollars to meet their payments, while banks faced a new tax on their foreign exchange gains.

The rupee closed at 285.27 per dollar, down 0.05 percent from Wednesday’s close of 285.13, according to the interbank market data. In the open market, however, the rupee gained 50 paisas to settle at 286 versus the greenback.

Currency dealers said the exchange rate was mainly driven by the supply and demand of dollars in the market. While the dollar had been falling due to improved supply in the past five sessions, the rupee came under pressure on Thursday as demand from importers increased.

“Exporters’ inflows slowed down, which put pressure on the rupee,” said a currency dealer. “However, in the previous sessions exporters were frequently selling dollars because of optimism about the economy after the IMF and Pakistan reached an agreement for the next tranche under the existing loan programme.”

However, the banking sector, which had benefited from the volatility in the exchange rate in the past two years, faced a new challenge as the government imposed a 40 percent tax on their windfall income from foreign exchange transactions.

“The banking sector became the first casualty of section 99D of the Income Tax Ordinance 2021 introduced in Finance Act 2023,” said Insight Securities in a note. The Federal Board of Revenue on Wednesday issued an SRO outlining the method for the computation of windfall gains on foreign currency dealing by the banks. Banks earned significant forex income during 2021 and 2022 and were accused by the then finance minister of manipulating exchange rates, it said. “Banks may pursue a legal route against the imposition of this tax due to potential ambiguity surrounding whether profits were earned through regular business activities or via manipulation. Moreover, the tax is retrospective in nature,” it added.