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Bank transaction tax fueling cash economy

Updated October 13, 2017

KARACHI: The much-vaunted tax on bank transactions introduced as a “documentation measure” a few years ago has “defeated the very purpose for which it was imposed”, the State Bank of Pakistan (SBP) said in a special section of its latest annual report.

The measure had a “negligible impact on revenue collections and incentivising tax filing”, leading instead “to an increase in currency in circulation and a decline in private business deposits”.

Cash in circulation increased 21.5 per cent on average between June 2015 and June 2017, the years when the tax was operative, against an average growth of 14pc per year in the past 11 years.

“Private business deposits as a percentage of total deposits, on the other hand, declined from 27.6pc to 25pc after the imposition of the withholding tax on banking transactions,” the report said.

Even as a measure to encourage the filing of returns, the tax has met with weak success. The number of filers of income tax increased, but there was no change in the filing of sales tax returns, probably because of the difficulties of obtaining refunds in the latter, the report noted.

Moreover, the number of income tax filers may have in­creased, but the proportion of non-filers as a percentage of total registered income taxpayers remained at 70pc.

Published in Dawn, October 13th, 2017