KARACHI: State Bank of Pakistan (SBP) has said that the imposition of withholding tax on banking transactions apparently failed to discourage the cash economy.
“The imposition of the WHT on banking transactions apparently defeated the very purpose for which it was imposed that is, to discourage the cash economy,” the SBP said in its annual report on state of economy.
The government imposed a withholding tax on non-filers of income tax returns through the Finance Bill 2015, initially at the rate of 0.6 percent on all non-cash banking transactions. Later, the tax rate was lowered to 0.4 percent after opposition from some section of society.
Through the Finance Act, 2005, the government imposed withholding tax, initially at the rate of 0.1 percent, on cash withdrawals from banks exceeding Rs.25, 000 in a day. Both tax rate and cash withdrawal limit have changed since then. For FY18, a WHT of 0.3 percent and 0.6 percent applies on filers and non-filers respectively on cash withdrawal exceeding Rs.50, 000 per day. However, filers can claim for refund of the amount paid in this tax.
While the WHT on non-cash banking transactions seems to have had a negligible impact on revenue collections and incentivizing tax filing, it instead led to an increase in currency in circulation and a decline in private business deposits.
Currency in circulation grew by 21.5 percent on average during July 2015 to June 2017 against an average growth of 14.0 percent recorded in the past 11 years prior to its imposition that is, between July 2004 to June 2015.
Private business deposits as a percentage of total deposits, on the other hand, declined from 27.6 percent to 25 percent after imposition of the WHT on banking transactions.
This shows that the imposition of the WHT on banking transactions apparently defeated the very purpose for which it was imposed that is, to discourage the cash economy.
