A few months ago, the government imposed a higher withholding tax rate (WHT) on all non-cash banking transactions. It resulted in a noticeable decrease in banking transactions and deposits. Following reports of a 17 percent drop from the retail sector, a 3.5 percent decline has been reported for non-filers.
Further Drop in Bank Deposits and Non-Cash Transactions
Withholding tax collection on non-cash banking transactions by non-filers dropped to Rs. 10.023 billion during the first 10 months of the current fiscal year (2016-17), down from Rs. 10.386 billion in the same period last year.
Federal Board of Revenue (FBR) has confirmed that the 3.5 percent drop in revenue from non-filers was a result of increase in cash based transactions and new income tax return filers.
Withholding Tax on Non-Filers
Through its Finance Act 2015, the government inserted Section 236P into the Income Tax Ordinance 2001, imposing a 0.6 percent withholding tax on non-cash banking transactions for individuals and businesses who do not file income tax returns. The rate was changed to 0.4 percent for the current year after protests from retailers and wholesalers.
This move was an attempt to encourage people to file income returns and wealth statements. However, the decision backfired as WHT revenues dropped in the retail sector as well as with individuals.
FBR states that the reduction to 0.4 percent failed to attract retailers and wholesalers towards documentations and instead, they opted for cash transactions outside the banking system.
Until the end of March, bank deposits from the retail sector dropped by 17 percent to Rs. 146.5 billion, compared to Rs. 176.83 billion in June 2016, reported the State Bank of Pakistan. In its report, SBP said that the tax promoted the use of hard cash and prize bonds for the settlement of transactions. Pakistan already suffers from one of the highest currency-to-cash ratios in the world and this move promoted it even further.
The Other Aspect
Some sources suggest that an increase in annual return filers has brought down the ratio as far as WHT from non-filers is concerned. By May 14th, income tax filers reached 1.15 million (16%) for the tax year 2016, up from 0.99 million for the previous year.
FBR is examining the WHT deduction data provided by the banks. The board also launched an online directory of Withholding agents for real-time verification of deposits by banks.
FBR’s Public Statement
In a public statement, FBR said that digital currency would work as a management information system so that withholding tax collection under various sections could be monitored in real time.
“The system has the capability to analyse current withholding data with historical withholding collections. FBR can benefit from this system by increasing revenue collections from withholding tax regime, and reducing the tax evasion pertaining to non-compliant withholding agents,” the statement said.