FBR collects Rs34bln withholding tax on cash withdrawals

KARACHI: The Federal Board of Revenue (FBR) has collected Rs34 billion as withholding tax on cash withdrawal from banks during fiscal year 2017/18, showing massive currency circulation in the system, sources said on Saturday.

The collection of withholding tax under this head increased by 11.5 percent when compared with Rs30.5 billion in the corresponding period of the preceding fiscal year.

Under section 231A of Income Tax Ordinance, 2001, banks are required to deduct 0.3 percent from income tax return filers, and 0.6 percent from non-filers on cash withdrawal above Rs50,000/day.

This adjustable tax was introduced at 0.3 percent through Finance Act, 2005 to compel the untaxed segment into the tax net and generate sizeable revenue. Despite these efforts, the FBR was unable to increase the number of return filers.

However, through Finance Act, 2010 the rate of withholding tax was increased to 0.6 percent for non-filers to increase the cost of transactions for tax dodgers.

Although, revenue generation under this head has increased significantly after this amendment, and the revenue board collected Rs23.27 billion in 2014/15, and Rs28.62 billion in 2015/16, the number of return filers remains abysmally low.

To counter the situation, the government further introduced Section 236P to Income Tax Ordinance, 2001 through Finance Act, 2015 and imposed 0.6 percent withholding tax on non-cash banking transactions of above Rs50,000/day made only by non-filers. The withholding tax rate has now been reduced to 0.4 percent.

This strategy was productive as the number of return filers increased by 0.87 million in 2013 to 1.5 million in 2018, showing growth of 72 percent. With the increase in the number of return filers, the collection of withholding tax under this head reduced significantly.

The FBR collected Rs22 billion in the first year (2015/16) of imposition and later it came down to Rs18.5 billion in 2016/17, further declining to Rs17.16 billion in 2017/18, according to data made available to The News.

On the other side, the introduction of Section 236P resulted in massive cash withdrawals leading to all time high circulation in currency and decline in private business deposits. According to the State Bank of Pakistan (SBP) annual review for 2016/17: “Currency in circulation grew by 21.5 percent on average during July 2015 to June 2017 against an average of 14 percent recorded in the past 11 years prior to its (Section 236P) imposition that is, between July 2004 to June 2015.”

The FBR sources said that huge potential exists in the banking system to increase times the number of taxpayers by scrutiny of withholding tax deduction of both cash withdrawal and non-cash banking transactions.

They said that due to litigation and lack of political will, the data of withholding transactions could not be obtained from banks. There are 49 million bank accounts in the country having population of 207.77 million, according to the SBP’s Payment System Review January-March 2018.

Meanwhile, deposits of banking system increased by 9.01 percent to Rs13.06 trillion by June 30, 2018 as compared with Rs11.98 trillion on the same day a year ago.