Tax collection from interest income surges by 183 percent in July-March

KARACHI: The collection of withholding tax from interest income earned through maintaining bank deposits surged by 183 percent during first nine months (July-March) 2019/2020 due to higher policy rate, sources said on Wednesday.

The withholding tax collection from profit on debt (banking deposits) increased to Rs47.26 billion during the first nine months of the current fiscal year, as compared with Rs16.72 billion in the same months of the last fiscal year.

Sources in FBR said higher interest rate attracted people to keep their money in their bank accounts. Although, the central bank reduced the policy rate to 11 percent, yet the rate was attractive considering economic conditions, especially after the coronavirus outbreak, they added.

The State Bank of Pakistan (SBP) last month eased the policy rate twice; first reduced by 75 basis points and later cut by 150 basis points to bring the policy rate at 11 percent. FBR sources said that since the economic activities had come to a standstill due to lockdown in order to contain the spread of the novel coronavirus, most of the people would prefer to keep their money in their bank accounts.

They explained that under Section 151(1)(b), withholding tax was collected on profit on debt paid by banking companies or financial institutions on account or deposit maintained. Every banking company was required to collect 10 percent of the gross yield/profit paid up to Rs500,000 or 15 percent of the gross yield / profit paid exceeding amount Rs500,000 at the time the profit on debt is credited to the account of the recipient or was actually paid, whichever was earlier.

Sources said that it was mandatory for the banks to collect double the amount of withholding tax from those persons receiving profit on debt, but were not on the Active Taxpayers List (ATL).

The government through Finance Act 2019 introduced 10th Schedule to the Income Tax Ordinance 2001 to enhance the rate of withholding tax by 100 percent on certain transactions. The measure has been taken to force persons making large transactions to pay withholding tax if they remained outside the tax net.

Sources further said that after the implementation of the 10th Schedule, the pace of return filing for Tax Year 2018 increased in order to avoid paying 100 percent higher rate of withholding tax.