Tax hike on mutual funds, cash withdrawal criticised

KARACHI: The government should withdraw the increase of tax rate on mutual funds, by an additional 10 per cent, which may discourage saving and investment trends among people, say experts.

Ibrahim Amin, a banking and financial expert, said that the government should refrain from targeting a sector contributing significantly to attract investments from local and foreign individuals and entities.

Asset management companies (AMCs) played a major role in enhancing the national saving-to-GDP ratio, financial inclusion and empowerment among people, particularly the middle class and their employer institutions over a period of a few years, he added.

In Budget FY26, the government has proposed revised tax rates for mutual funds based on the proportion of income derived from their average annual investments. Income from debt securities will be taxed at 25 per cent, while income from equities will be subject to a 15 per cent tax. Through this measure, the government aims to generate Rs1.4 billion in revenue during the upcoming financial year.

The government increased the tax rate on interest income from 15 per cent to 20 per cent for non-filers to generate an additional Rs 70-110 billion in revenue.

Chairperson Dellsons Associates Ibrahim Amin mentioned that the government terminated the tax benefits for investors of mutual funds a couple of years ago and now it enhanced the tax rate of a segment of mutual funds substantially.

He remarked that mutual funds have served as a trusted financial tool for freelancers and middle-class investors seeking safe, regulated, and professionally managed investment avenues. Increasing taxes up to 25 per cent on certain categories of mutual fund income could discourage voluntary compliance and disincentivise investment by Pakistan’s growing digital workforce.

In FY24, the saving-to-GDP ratio increased to 14.1 per cent from 12.6 per cent last year due to attractive rates offered by the financial institutions which also generated record tax revenues to the national kitty.

He also suggested the government introduce incentives for non-filers instead of overtaxing them for investments in the banking and financial sectors. It also increased withholding tax on cash withdrawals above Rs50,000 for non-filers.

The rise in withholding tax on cash withdrawals will increase currency in circulation in the national financial system, undermining the measures of the banking regulator and financial institutions for increasing financial inclusion. These measures risk derailing the positive momentum seen in financial inclusion and formal savings -- two essential pillars of economic stability and long-term growth, he added.