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.
“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.