The negative effects of the government decision to impose withholding tax on financial transactions have started appearing on the banking industry as the process of bank deposits have been slowing down since the scheme started during the previous financial year. The business community also resisted the scheme and started using other mods of payment when failed to convince the government to withdraw its plan. As a result, the growth of bank deposits slowed down but circulation of money increased. The business community also started using dollars as mod of payments, avoiding banks for financial transactions. According to a report issued by the State Bank of Pakistan, the government move has forced many private banks to offer lucrative schemes for the business community to raise deposits. The report sees increase in private sector deposits by Rs149.4 billion during the first nine months of the financial year 2016 which is less than half of the rise recorded during the corresponding period of financial year 2015.
It is clear that imposition of withholding tax on financial transactions did not bode well for the financial sector. Despite introduction of tax amnesty scheme and other stop-gap measures, the tax base of the country remained low. Besides, recession in the global economy has also shed negative impact on some sectors in the country. Pakistan has the lowest rate of foreign investment as it received only $1 billion last year as compared to $26 billion by Indonesia during the same period.The China-Pakistan Economic Corridor is the only hope for the foreign investment, but exports of the country have declined despite good performance by the industrial sector during the last fiscal year. The foreign exchange reserves have reached their historic highs and a record tax collections have been made this year. However, the government has to take urgent steps to facilitate the business community and streamline the economy.
The issue of withholding tax is still lingering on, but the government seems in no mood to listen to the plight of the business community. Rather, the government has announced tough action against non-filers who are being threatened and coerced to accept the government conditions. There is a need to encourage small and medium level entrepreneurs to work hard and fully participate in the economic development of the country. It should be noted that success of the individuals is the success of the nation and undue pressure on the business community will not serve any purpose. The government should have to take steps to increase tax net, but withholding tax kind of venture will have negative impacts on the economy.
