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Dar’s cash withdrawal tax proposal draws criticism from bankers

By Erum Zaidi
June 10, 2023

KARACHI: Finance Minister Ishaq Dar proposed on Friday to implement a tax on cash withdrawals made by non-tax payers as a measure to address the fiscal deficit in the country. However, bankers and analysts cautioned that this move could have adverse effects, including the potential strengthening of the cash economy and impeding efforts toward financial inclusion.The government unveiled its budget in an effort to strike a balance between reviving the country's faltering economic growth and the strict requirements put out by the International Monetary Fund (IMF) to resume the stalled bailout package. The country is also preparing for elections this year.

Tax revenue for the fiscal year 2023-2024 is projected to total Rs9.2 trillion (US$60 billion), and non-tax revenue Rs2.9 trillion (US$19 billion). In his speech, the finance minister said the government would impose a 0.6 percent advance withholding tax on non-Active Taxpayer List (ATL) persons on cash withdrawals from the next fiscal year. "The government wants to limit cash transactions because it believes that by increasing the number of taxpayers, it will increase domestic revenue collection and help in the documentation of the economy," said Ahmed Ali Siddiqui, a banker and director of the IBA Centre for Excellence in Islamic Finance.

"However, I believe that this approach will promote financial transactions outside of traditional banking channels. We need to determine and then wait to see how imposing taxes on cash withdrawals made by non-filers would affect banks and increase tax revenue," Siddiqui added.Because cash is still widely used in Pakistani society, the central bank is encouraging banks to digitize faster in order to overcome obstacles to eliminating cash payments and promoting digital payments. In the third quarter of the current fiscal year, electronic banking transactions increased by 11.2 percent to Rs44.3 trillion (US$280 billion) from Rs39.8 trillion (US$250 billion) in the previous quarter, according to data from the State Bank of Pakistan.

"Tax on cash withdrawal on Non ATL is negative for banks and has previously proved to be unfruitful for the economy as currency in circulation increased," said Fahad Rauf, head of research at Ismail Iqbal Securities."Also, taxing extraordinary gains from foreign exchange fluctuations would be negative for banks," Rauf added. The finance minister said that the country's foreign exchange reserves needed to be increased, but there werealso loopholes that were depleting the reserves that needed to be closed.

In order to prevent the outflow of foreign cash through debit and credit cards and other banking channels, he said that the withholding tax had been raised from 1 percent to 5 percent for tax filers and 10 percent for non-filers on overseas transactions. "Tax increase on [foreign transactions via credit/debit cards] would discourage spending, so not really good for banks," Rauf noted.

According to Siddiqui, this causes pressure on the currency in the open market since the foreign traveler will acquire cash dollars from the market and carry them with them. "Well, I think the budget is neutral for most sectors, with tremendous measures announced for the promotion of the IT sector and IT exports. For banks, the positive is that other than an increase in super-tax to 10 percent, no new tax on banking companies' income has been imposed," said Mustafa Mustansir, head of research at Taurus Securities. "However, fee income for banks may suffer due to an increase in withholding tax on card payments from 1 percent to 5 percent, as this may discourage such volumes. Also, imposition of tax on cash withdrawals will be detrimental to deposits as it would encourage an increase in cash-based transactions. Super-tax has been imposed across the board," Mustansir said. "Whereas, minimum tax on listed companies has been reduced to 1 percent. Higher super-tax will be detrimental for listed companies. No other major relief measures have been announced for any particular listed sector other than IT," he said.