The federal government has assured the business community that it will abolish withholding tax (WHT) on banking transactions for income tax return filers. This will be announced in the upcoming finance bill on January 23, 2019.
This was stated by the acting president of Karachi’s Chamber of Commerce & Industry (KCCI) Khurram Shahzad, while referring to a meeting of KCCI’s delegation with Minister of State for Revenue Hammad Azhar held in Islamabad.
Khurram Shahzad said that KCCI’s recommendations for the forthcoming Finance Bill were extensively discussed during the said meeting in which the Minister, while assuring to incorporate numerous suggestions, agreed to abolish withholding tax (WHT) on cash withdrawal from bank accounts for return filers with a view to encourage ease of doing business.
Withholding tax on financial transactions was imposed with an aim to increase compliance and broadening of the tax base. But this decision had a negative impact on bank deposits. To handle this situation, the government reduced the WHT charged on non-cash transactions from 0.6 percent to 0.4 percent and tax on filers remained at 0.3 percent.
The State Bank of Pakistan (SBP) strongly recommended reducing the rate from 0.3 percent to 0.1 percent in the budget for 2018-19 but this was not included in the budget. The deposit-to-M2 ratio has continued to slide during FY2017 and FY2018, which indicates that the impact of withholding tax is still hindering the movement of cash back into the banking system.
SBP said in the annual report for the fiscal year 2017/18 that the private business deposits as a percentage of total deposits declined from 27.6 percent to 25 percent after imposition of the WHT on banking transactions.
The government imposed withholding tax on cash withdrawal through Finance Act 2005 in order to discourage cash economy. Banks are obliged to collect advance tax at the rate of 0.4 percent from non-filers and 0.3 percent for filers on non-cash banking transactions such as transfer of funds through demand draft, pay order, cash deposit receipt cheques/clearing, online transfers, direct debit, telegraphic transfers etc, which are in excess of Rs. 50,000 per day.