According to a recent report, banking transactions and deposits have experienced an overwhelming decline after the imposition of higher withholding tax rate. The step was taken by the government a few months back in which all non-cash banking transactions were the actual part of this tax imposition. Subsequently, the retail sector has experienced a 17% decline followed by a 3.5% drop in the case of non-filers.
A comparative analysis revealed that during the beginning of the current fiscal year (2016-17), a drop of Rs10.023 billion had been encountered on the part of non-cash banking transactions by non-filers. While during the same era as seen in the last year, the withholding tax collection statistics were no more than Rs10.386 billion.
This noticeable decline, which accounts to a drop of 3.5% in revenue, has been justified by the Federal Board of Revenue (FBR) to be a consequence of the recent imposition of tax on cash based transactions and income tax return filers.
Impact on Non-Filers
In the effort of encouraging the mass to duly file their assets and income returns, the government took the step to impose Section 236P into the Income Tax Ordinance 2001 following the Finance Act 2015. This step sanctioned the individuals and business personnel failing to file income tax returns with 0.6% withholding tax on non-cash banking transactions.
This decision was first amended in the current year with the rate being changed to 0.4% when the retailers and wholesalers decided to go for a protest. Furthermore, the drop in the withholding tax revenues by the individuals and the retail sector resulted in an adverse impact to this decision.
Mass impact of the decision
According to the FBR, the retailers and wholesalers were not happy with the government’s decision even with the drop of 0.4% in withholding tax. Instead of opting for documentations, cash transactions outside the banking system seemed a better option.
Adding to these aftermaths, according to SBP, Pakistan is already prey to the highest currency-to-cash ratios throughout the world. In addition, this act by the government further paved way for the unrest. In support of their statement, SBP further reported that a 17% drop in the bank deposits on the part of retail sector resulted until the end of March. This accounts to Rs146.5 billion, while in June 2016; this figure remained to Rs176.83 billion. As a result of which the population decided to settle their transactions through prize bonds and hard cash.
As per the sources, the drop in the ratio has been more affected from the part annual return filers. The recent tax year of 2016 revealed a figure of Rs1.15 million i.e. 16% reached by the income tax filers by May 14th compared to Rs0.99 million for the previous year.
Continuous investigation of the withholding tax deduction data is under process by the FBR that has been provided by the banks. In order to keep fraud-free verification of the deposits, FBR has also launched an online directory of the withholding agents.
Statement by FBR
The real-time verification system proposed by the FBR would work as a management information system. In a public statement, the FBR supported their theory, stating:
“The system has the capability to analyse current withholding data with historical withholding collections. FBR can benefit from this system by increasing revenue collections from withholding tax regime, and reducing the tax evasion pertaining to non-compliant withholding agents”.