Govt’s Decision to Impose Withholding Tax on Banking Transactions Backfires

The government imposed a high withholding tax on all non-cash banking transactions a few months back, which has resulted in a notable decrease in banking transactions as well as bank deposits. Since the imposition of the tax, bank deposits of the retail sector have dropped by 15 percent.

According to the data released by the State Bank of Pakistan (SBP), bank deposits by the retail sector dropped to Rs 151.58 billion, by the end of February 2017, as compared to Rs. 177 billion in June 2016.

WHT on Non-Filers

Through Finance Act 2015, the government introduced withholding tax scheme for filers and non-filers of income tax returns. Non-filers are taxed higher than filers. The measure was intended to increase the cost of businessmen and to obtain income taxes beforehand.

The decision was heavily criticized by the retail sector and as a result of the protests, the government was forced to reduce withholding tax rate from 0.6 percent to 0.3 percent. It now stands at 0.4 percent.

The government also introduced an amnesty scheme for small traders to avail the scheme in order to avoid imposition of withholding tax. However, the scheme was a complete failure as only a few thousands small traders took advantage of it.

SBP, in its annual report for the fiscal year 2015-16, stated that the measures taken by the government, in the 2016 budget, to widen the differential taxation structure for filers and non-filers had a negative fallout.

SBP stated:

“For instance, the imposition of withholding tax on banking transactions for non-filers led to a decline in deposits growth (particularly those of private businesses); increase in the use of hard cash (and prize bonds) for the settlement of transactions, leading to 2 percentage points increase in currency in circulation to GDP ratio; and a fall in investments in savings instruments.”

Pakistan already has one of the highest currency-to-cash ratio in the world and by imposing higher taxes on non-cash transactions, the government is promoting even more use of cash, states the SBP.

These issues could constrain future tax collection and undermine financial inclusion efforts of the government and the SBP.

Via PKRevenue

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  • Even a Lay man can understand this, which is thoroughly explained by SBP, but I guess Ishaq Dollar need brain surgery to understand.

  • Government has introduced a 40k prize bond to facilitate non-banking transactions. SBP should release a 10k rupee note for the same reason. Also tighten KYC/AML requirements so that people can’t open bank accounts. Especially those silly mobile accounts that are so easy to open.

  • In the first phase it was brain drain game which eventually resulted in the export of more of those Intellectuals, Doctors, Engineers, Scientists and Professors. Now its business drain game.. it looks like they don’t even know whats happening. They let go the resource generators and now the resources, whats going to happen when everything wipes out in such a childish innocence…. at least you can’t cry :P

  • Hire competent workforce before taking critical nation stability decisions.

    Build public trust by actively utilizing funds under the common citizens’ interest.

    Compare the current state of the nation with developed or highly growing economies and study their past to understand corrective measures taken by them whilst facing similar challenges.

    Invite experts/intellectuals from all parts of the world to share their opinion and how they believe current process/policies could be improved.

    Invest heavily in research and development, primarily forecasting using modern/highly accurate tools to ensure sustainability.

    Compensate workforce (from top to bottom) on performance-basis to ensure timely required actions are being taken.

    Solve personal conflicts and any differences away from workplace, during non-working hours.

    Implement rules, policies, systems that aren’t ego-satisfying. And engage governing authorities in brain-challenging, discipline oriented, openness to communication activities.

    • They should hire ‘Angreezi parhnay aur samajhnay wala’ first and all your suggestions (which are really good) are against national (politicians) interest.

  • Until and unless Govt suspends 5000 notes and 5000+ prize bonds, people will keep carrying cash and keep out of tax net. It’s the main cause of policy failure.

  • Imposing WHT Tax is a crime on general public (already paying several other taxes)…. and specially with such a high rates (Just imagine Telecom Sector with whooping 14% rate). Because over 90% of this money is going directly in the corrupt politicians pockets, and this is why Money Laundering is a very big issue in our country right now :(

  • People will not pay tax happily till
    1) Ayan Ali, who caught red handed, should be punished properly
    2) 2009 Hajj crime. If Hamid Saeed kazmi is proved innocent then catch the true criminal
    3) Money is recovered from prime minister for the aeroplane sent vacant to UK and bring him and his family back.

    and the list goes…..

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