KARACHI: The use of large denomination prize bonds has increased sharply to avoid deduction of withholding tax on non-cash banking transaction and escape from declaring the undocumented income.
According to a report issued by State Bank of Pakistan (SBP) the investment in Rs40,000 and Rs25,000 prize bonds increased by 60 percent and 80 percent, respectively after the imposition of withholding tax in 2015/2016 as compared with the preceding fiscal year.
The investment in Rs40,000 prize bonds increased to above Rs40 billion by fiscal year 2015/2016 as compared with about Rs25 billion in fiscal year 2014/2015. Similarly, the investment in Rs25,000 prize bonds increased to about Rs27 billion in 2015/2016 as against investment of about Rs15 billion in the preceding fiscal year.
The government in budget 2015/2016 imposed withholding tax at 0.6 percent on all transactions up to Rs50,000 non-cash banking instruments. The prevailing withholding tax rates is 0.4 percent.
The SBP said that the unintended consequence of the increase in withholding tax was the higher inflows for prize bonds during fiscal year 2015/2016.
“Anecdotal evidence suggests that businesses have been using these instruments to settle their transactions instead of using banking instruments like demand drafts, cheques, etc.This is the major reason why the increase was more pronounced for larger denomination bonds, including Rs 40,000 and Rs 25,000,” the SBP said and added that hence, higher investments in prize bonds have come at the expense of bank deposit growth.
