KARACHI, Sept 19: The Federal Board of Revenue (FBR) has directed commercial banks to deduct withholding tax on entire cash withdrawn by an account holder if it exceeds the exempted limit of Rs25,000

The FBR through a circular No 9 dated August 15, 2008 has reminded the commercial banks that it was clarified in April 2008 that withholding tax on cash withdrawal under the provisions of section 231-A will now be made on total amount and not on amount exceeding the exemption limit of Rs25,000.

However, the banks were violating these directives and were still deducting withholding tax on cash withdrawal exceeding Rs25,000 only. According to official sources, the FBR also issued notices to banks in this regard asking them to do away with past practice of partial deduction.

Official sources disclosed that the FBR had also lodged claims against the defaulting banks and is seeking recovery of balance amounts due towards withholding tax deduction on total cash amounts withdrawn.

In order to discourage cash economy the FBR in July 2005 launched a scheme of deducting withholding tax at the rate of 0.1 per cent by introducing new section 231-A in the Income Tax Ordinance 2001.

This also covered cash withdrawals made on credit cards or from ATMs but amounts up to Rs25,000 were exempted from such tax deductions. However, federal and provincial governments, foreign diplomats and persons, who are given exemption by income tax commissioner, fell outside the ambit of this scheme.

Last year, the FBR increased the withholding tax rate from 0.1 to 0.2 but in the new budget the same has been enhanced to 0.3 per cent by bringing an amendment through Finance Act 2008.

Ali Rahim, former president Income Tax Bar Association Karachi appreciating the FBR move said this would help to sort out the tricky issue because the new circular of August 15, 2008 will allow banks to start afresh by deducting withholding tax on total amount and not on amount exceeding Rs25,000.