Govt plans to slash WHT on banking transactions

KARACHI: The government planned to slash withholding tax rates on cash and non-cash banking transactions as the direct tax hampered growth of banks with non-banking channels largely being used for the financial dealings, sources said on Friday.

Sources in the Federal Board of Revenue (FBR) said the government planned to reduce withholding tax rates and number of withholding provisions to facilitate taxpayers. The taxes are negatively affecting the use of banking sector, they added.

The government acknowledged in various documents that withholding tax imposition is a major impediment to banking sector’s growth. “Depth and breadth of financial system remain low in Pakistan as indicated by lower bank deposits as percentage of GDP due to lower saving rates in the economy, high currency (in circulation) to deposit ratio and imposition of withholding tax on cash withdrawals and bank transfers,” a document submitted to the International Monetary Fund (IMF).

Pakistan is likely to hold a second round of talks with the IMF next month to discuss monetary support to the country’s external account position. The Federal Board of Revenue (FBR) collects withholding taxes on cash withdrawal, non-cash transactions and profit on debt. The taxes are applicable on both filers as well as non-filers. Non-filers are required to pay higher withholding tax rates on banking transactions.

The State Bank of Pakistan (SBP) said the foremost reason that triggered the reversal of trend in deposits to M2 ratio a couple of years ago was the imposition of withholding tax on non-cash banking transactions, exceeding Rs50,000 for non-filers. Though the general perception was that bank deposits subsequently recovered in FY2017 and FY2018, data showed a different picture.

“The deposit-to-M2 ratio has continued to slide during FY17 and FY18, which indicates that the impact of withholding tax is still hindering the movement of cash back into the banking system,” the SBP said in annual report for the last fiscal year 2017/18.

The government imposed withholding tax on financial transactions with an aim to increase compliance and broadening of tax base. It also resulted in additional revenue for the FBR. The government imposed withholding tax on cash withdrawal through Finance Act 2005 in order to discourage cash economy. It further imposed withholding tax on non-cash transactions that was aimed to increase the cost of transactions made by non-filers of income tax returns.

“Private business deposits as a percentage of total deposits declined from 27.6 percent to 25 percent after imposition of the WHT on banking transactions,” the SBP said in the report. “This shows that the imposition of the withholding tax on banking transactions apparently defeated the very purpose for which it was imposed that is, to discourage the cash economy.”