The State Bank of Pakistan (SBP) has proposed that withholding tax on cash withdrawals and banking transactions of tax filers should be reduced and should only be charged to non-filers at the same rate in the next budget (2018-19).
According to the budget proposals of the SBP for 2018-19, the SBP has referred to section 231 A & 231 AA of the Income Tax Ordinance pertaining to the withholding taxes (WHT) on cash withdrawn and banking transactions in cash.
An advance tax of 0.3% for filers and 0.5% for non-filers should be collected on cash withdrawals if the total sum exceeds Rs 50,000 a day, the SBP proposed.
The SBP has proposed that the advance tax rate should be rationalized to 0.1 percent for filers.
All cash loan disbursements to microfinance borrowers and agricultural loan borrowers should be exempted from withholding tax. Accordingly, it was proposed that Section 231 A may be revised as:
“Every banking company shall deduct tax at the rate specified in Division VI of Part IV of the First Schedule, if the payment for cash withdrawal, or the sum total of the payments for cash withdrawal in a day exceeds fifty thousand rupees. However, borrowers of microfinance banks with income levels below ‘minimum taxable income’ shall be exempted from withholding tax deductions on withdrawal/encashment of loan proceeds in excess of the aforesaid.”
The SBP has proposed to accommodate the compliant taxpayers. It has been suggested that withholding tax for the tax filers may be reduced and withholding tax shall be charged to non-filers at the same rate. Such measures will help increase the documentation of economy and will promote financial inclusion. Similarly, the higher rate for non-filers will motivate them to become tax filers in order to avoid the additional cost.
The second proposal is to exempt this WHT on micro-borrowers, particularly, farmers and microfinance borrowers, as it is a burden on them. These borrowers are facing increased burden by paying an additional cost of WHT on cash withdrawal from their loan accounts. The tax is affecting low-income clients who do not fall within the tax payable brackets. This tax adds to the cost of doing business for the financially vulnerable individuals whom the government is also trying to support by taking a number of measures.
Tax on Non-Cash Transactions
The SBP has also proposed an amendment in section 236P – advance tax on banking transactions other than through cash.
The advance tax of 0.6 percent (currently 0.4%) should be imposed on all non-filers including those which are not liable to pay tax e.g. where their income falls below a taxable threshold, the tax is deducted at source on all of their taxable income or they are otherwise exempted from tax.
This section 236P should ideally be removed. If that is not possible, an exemption should be provided to students, widows, pensioners, salaried class and farmers, the SBP proposed.
The removal of WHT on banking transactions would facilitate the financial inclusion strategy of SBP. The WHT on non-cash banking transactions led to an increase in currency in circulation and a decline in private business deposits. That decline further triggered a hike in currency in circulation, which grew by 21.5 percent on average during July 2015 to June 2017.
Private business deposits as a percentage of total deposits, on the other hand, declined from 27.6 percent to 25 percent after imposition of the WHT on banking transactions. This shows that the imposition of WHT on banking transactions apparently defeated the very purpose for which it was imposed – to discourage the cash economy.
As per the annual report of State Bank of Pakistan for the year 2016-17, WHT on cash transactions did not trigger a significant hike in currency in circulation, but WHT on non-cash banking transactions has led to a significant hike in currency in circulation. The said analysis suggests that the imposition of WHT on non-cash banking transactions needs rethinking.
The widows and pensioners receive very low compensation/income that also falls below the taxable threshold. And in case they are able to save something, tax is deducted on its withdrawal which is unfair as they cannot claim credit for the amount deducted, being not liable to file returns. Similar is the case with the students who do not have any source of income but are liable to tax and accounts are being maintained by them solely for the payment of fee and to meet their educational and boarding expenses.
Due to an increase in fee from educational institutions, they have to make payments exceeding the taxable threshold that is subjected to tax. It is pertinent to mention here that educational fee is already subjected to tax @5% u/s 236-I if the fee exceeds Rs 200,000; therefore, charging tax on student accounts again is double taxation and students cannot claim credit of amount deducted as they are not liable to file income tax returns, the SBP added.