KARACHI: The government has reduced the withholding tax (WHT) on non-cash banking transactions for non-filers to 0.4 per cent down from 0.6pc.

Finance Minister Miftah Ismail also announced that the super tax would be continued for 2018-19 but the rate will be reduced by 1 percentage point per year from 2018-19 onwards for both banking and non-banking companies. It is currently being charged at 4pc and 3pc on banking and non-banking sector, respectively, having income greater than Rs500 million.

The tax was originally imposed in 2015 for the rehabilitation of internally displaced persons and was continued in 2016 and 2017.

State Bank of Pakistan (SBP) in its earlier report said that the WHT on non-cash banking transactions pushed up currency in circulation and a led to a reduction in private business deposits. That decline further triggered a hike in circulated currency, which grew by 21.5pc on average during July 2015 to June 2017.

Private business deposits as a percentage of total deposits, on the other hand, fell from 27.6pc to 25pc after imposition of the WHT on banking transactions.

This shows that the imposition of the WHT on banking transactions apparently defeated the very purpose for which it was imposed ie to discourage the cash economy. In FY18, a WHT of 0.3pc and 0.6pc applied on filers and non-filers respectively on cash withdrawal exceeding Rs50,000 per day. However, filers can claim a refund of the amount paid in this tax. Bankers believe the removal of WHT on banking transactions would facilitate the financial inclusion strategy of SBP.

The widows and pensioners receive very low compensation or income that also falls below taxable threshold. And in case they are able to save something, tax is deducted on its withdrawal while they cannot claim credit for the amount deducted, being not liable to file return.

Similar is the case with the students who do not have any source of income but are liable to tax and accounts are being maintained by them solely for payment of fee and to meet their educational and boarding expenses.

An official report said that a 0.1pc increase in the WHT on cash withdrawals leads to 0.13pc rise in FBR revenue while a similar uptick in the tax on banking transactions leads to only 0.009pc growth.

“The decisions about the super tax and tax reduction in non-cash banking transactions are in the right direction for the banking industry,” said National Bank of Pakistan President Saeed Ahmed while commenting on the new budget.

The government has decided to reduce corporate tax rates from 30pc in tax year 2018 to 25pc in tax year 2023 — to be reduced by 1 percentage point each year up to 2023.

Published in Dawn, April 28th, 2018