The government’s tax commission has suggested eliminating hard currency from the market and reintroducing withholding tax on banking and cash withdrawals in an effort to widen a very constrained revenue base.
According to government sources, the Federal Board of Revenue (FBR) is actively considering suggesting the reinstatement of a 0.6% tax on cash withdrawals, banking instruments, and banking transactions beginning in July of this year.
But it appears that both of the ideas made by the Reform and Revenue Mobilisation Commission (RRMC), under the direction of Ashfaq Tola, are in conflict with one another.
In the past, people have successfully maintained cash outside of the banking system, so the tax on cash withdrawals by non-filers of tax returns may promote the growth of the informal sector.
The RRMC suggested that the government look into ways to stop the use of hard currency in the country or at least decrease its circulation. The plan is to stop foreign exchange companies from dealing in dollars and instead give commercial banks, who will record these transactions, control of the foreign currency market.
According to a study created by the RRMC, all transactions involving foreign currency should go through the banking system, with the exception of handing out cash in dollars to departing travellers at airport counters, which can be handled there.
The management of Pakistan’s tax system is still insecure and weak. Only 3.6 million of the 7.6 million people who are enrolled with the FBR file tax returns, demonstrating the inefficiency of the tax system.
Foreign exchange companies help move monies in and out of the nation, but some of them have been implicated in money laundering in the past.
According to sources, the government has withholding tax on banking transactions and cash withdrawals on its agenda for the upcoming budget, and its position has “been strengthened by the RRMC report.”
The withholding tax on cash withdrawals, financial instruments, and non-cash banking transactions was one of the many withholding tax laws that had previously been removed. As a result, the report claims that the withholding tax’s contribution to direct taxes decreased.
However, the RRMC suggested that the withholding tax on cash withdrawals, other banking transactions, and banking instruments be reinstated for people who don’t file tax reports.
In Pakistan, which has a population of 246 million and an income tax filing threshold of 3.6 million, everyone is a non-filer.
The RRMC thought that the reinstatement of withholding tax would offer useful information regarding non-filers, who cost the nation revenue. However, in the past, the FBR was unable to use the data if the tax had been in force for longer than six years.
The International Monetary Fund (IMF) and the World Bank had both resisted the government’s attempts to reinstate the tax on cash withdrawals in February of this year.
In order to conclude the ninth review of the loan programme, Pakistan and the IMF have been unable to come to a staff-level agreement. It’s possible that the government will move forward with its intentions to reimpose the withholding tax as a result of the strained ties.
The government has also failed to agree to the IMF’s demand to talk about the budget for the upcoming fiscal year since the finance ministry believes that the budget cannot be linked to acceptance of just the ninth review.
But the reintroduction of withholding tax could jeopardise the $450 million budget support loan from the World Bank that Pakistan is frantically attempting to secure in order to secure some funding despite declining foreign exchange reserves.
Measures like the tax on cash withdrawals or deposits are regressive in nature and go against the idea of equitable and fair taxes.
The 0.6% withholding tax on deposits may result in more money being circulated. The SBP’s figures show that as of the end of December 2022, the total deposits in the banking sector were close to Rs22.5 trillion. These include the Rs 10.5 trillion in personal deposits held by salaried individuals, businesspeople, and others.
It appears that the main objective is to boost tax revenue at the expense of significant repercussions for many different economic sectors.