SBP Proposes Abolishing Withholding Tax on Cash Withdrawal From Banks

The State Bank of Pakistan (SBP) has sent budget proposals for 2020-2021 that are under consideration of the Federal Board of Revenue (FBR).

According to media reports, the central bank has proposed to abolish the withholding tax (WHT) on cash withdrawal from banks in the upcoming budget that will curb the increasing cash-based transactions in the country.

The central bank also asked for doing away with Super Tax on the banking sector.

It has proposed a few amendments in the tax laws for rationalizing various tax provisions concerning the financial sector:

  • Withholding tax on cash withdrawals etc.
  • Corporate tax rate
  • Super tax
  • Profit on debt

According to the proposals, individuals and businesses reduce the use of banking channels for meeting their day-to-day financial needs and prefer to keep cash in hand. The primary object of the withholding taxes on cash withdrawal from financial institutional was to discourage the cash economy and encourage documentation for the economy.

However, it had the opposite result as it is actually encouraging cash-based transactions in the country and resulting in an increase in currency in circulation. Due to this operational tax the small depositors avoid keeping their money in the financial institutions which leads to financial disinter-mediation in the country.

They somehow reduce the Currency in Circulation to Deposit Ratio that had increased from 293 percent in June-15 started declining and grew up by just 41.1 percent on Jan 20.

It is suggested that the WHT on cash withdrawals should be removed as it will help improve the deposit mobilization and growth of financial inclusion.

SBP has also proposed to align the corporate tax rate applicable to banks with that of other companies by reducing it from 35% to 29%. In a similar context, the super tax of 4 percent, in addition to the corporate tax rate, should also be withdrawn in the coming budget.

It has also suggested certain amendments in the Income Tax Ordinance 2001 enabling the State Bank of Pakistan (SBP) and its subsidiaries to capture the entire scope of tax exemptions.

It also recommended the provision of rebates/concessions to Micro Finance Banks (MFBs), Small and Medium Enterprises (SMEs), and Sharia-compliant businesses to promote financial inclusion and to encourage the growth of Sharia-compliant businesses.

SBP has proposed a tax exemption for the Corporate Restructuring Company (CRC) for five years from starting its operations.

The primary objective of the CRC is to transform the financially distressed companies into economically and operationally viable companies and also resolve the issue of non-performing loans (NPLs) of financial institutions. It will help enhance business growth and support creation of employment opportunities.