KARACHI: Businesses operating outside the banking net seem to be flourishing in the country.

This is reflected by the substantially reduced collection of withholding tax on banking transactions in 2016.

According to an estimate, the size of business conducted in cash nearly doubled in one year. Bankers said the size of non-bank or cash-only business is estimated to be Rs4,800 billion, up 85 per cent from a year ago when it stood at Rs2,600bn.

Traders are increasingly relying on cash to avoid levy on banking transactions

They said the collection of withholding tax on banking transactions is below the target and may fall further.

Like other medium-size businesses, most dealers of second-hand cars are said to have left the banking net. Dealing in cash is both easier and cheaper than using the banking channels, they said.

“We deal in millions in cash each day. It saves us withholding tax, which we believe is not justified,” said Sarfaraz Aalam, a second-hand car dealer in Hyderi Market.

Hundreds of cars are sold every day in more than five second-hand car markets in Karachi alone. Market sources said the second-hand vehicle business in other parts of Pakistan follows the same pattern.

“We keep cash at home. It is more dangerous to draw cash from banks and carry it around,” said Mr Aalam.

A non-filer of income tax return is required to pay 0.4 per cent withholding tax on all banking transactions exceeding Rs50,000 in a day.

Instead of cash, some traders also use dollars for payments. They find the transaction mode better despite the obvious risks, such as snatching and robbery, they said.

In one of its reports, the State Bank of Pakistan (SBP) indicated that the collection of withholding tax on cash transactions has gone down.

The government has shown limited flexibility over the business community’s demand for the abolition of the tax on banking transactions. Instead of eliminating it, the government reduced the rate of withholding tax from 0.6pc to 0.4pc.

The business community has been in a defiant mode since the imposition of this tax by resorting to cash-only transactions.

Currency market experts said the circulation of money outside the banking net is bad for the economy.

“If the size of cash dealing is close to Rs5 trillion, it simply means black money is not only circulating but also multiplying at a high rate,” said a senior banker.

The size of black money is not fully known. But experts believe its largest amount is invested in the property business, as real estate prices continue to soar.

Traders said they are not ready to take a hit on their profit margin by paying withholding tax on each transaction that exceeds Rs50,000 in a day.

“Cash, dollars and bonds are alternatives to banking transactions,” said a currency dealer.

Published in Dawn, March 12th, 2017