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Tax collection on cash withdrawal dives 63 percent

March 08, 2020

KARACHI: Withholding tax collection on cash withdrawal from banking system sharply fell 63 percent in the first eight months of the current fiscal year, official data showed. This sharp decline was because of the exemption from the levy given to active taxpayers.

The tax authorities collected Rs5.22 billion as withholding tax on cash withdrawal during July-February 2019/20 compared with Rs14 billion collected in the corresponding period of the last fiscal year. The collections were made from banks having head offices located in Karachi.

In February, the collection of withholding tax fell even more sharply by 67 percent year-on-year. The collection under the head was Rs683 million in February 2020 compared with Rs2.1 billion in the same month of the last fiscal year.

The sharp decline in revenue collection could be attributed to relief granted to income tax return filers having their names in the active taxpayers list (ATL).

In February last, the government exempted ATL members from the withholding tax deduction on cash withdrawal from banks. The exemption was effected in the Finance Supplementary (Second Amendment) Act 2019.

The levy of 0.6 percent is now only on individuals whose names are yet to be included in the ATL. Notably, the withholding tax is adjustable against tax liability for individuals filing annual tax returns.

In 2005, the government introduced a law (section 231A of Income Tax Ordinance, 2001) to empower the tax authorities to collect withholding tax on cash withdrawal from banks. Under the law, every banking company is required to deduct tax from cash withdrawal above Rs50,000 in a day. The tax is too applicable on withdrawal from multiple bank accounts by an individual in portions each smaller than Rs50,000. If the aggregate amount exceeds the benchmark, the tax would be applicable.

The tax incentive was introduced to discourage cash economy and force individuals having taxable income to comply with the returns filing. Withholding tax encourages individuals to file their income tax returns.

However, the latest Federal Board of Revenue’s (FBR) ATL showed a downtrend in returns filing as around 2.53 million individuals/companies filed annual returns for the tax year 2019 up to February 29 as opposed to 2.83 million filed for the tax year 2018, showing a gap of around 300,000. The tally was, however, 60 percent higher than 1.6 million returns filed till February 28, 2019. The government had extended returns filing deadline multiple times to pull up the quantity for the previous tax year.

Analysts said the levy is a burden on the compliant taxpayers and individuals filing their returns are facing difficulties in adjusting or receiving refund payment against the deducted amount.

Though compliant taxpayers are exempted from withholding tax, banks still share information of all accountholders – filers and non-filers – making cash transactions above Rs50,000 per day with the FBR.