KARACHI, July 7: Many banks are collecting advance tax of 0.1 per cent on the total cash drawn instead of the amount that is in excess of Rs25,000, leading to frictions and altercations between the customers and staff at many branches.

Bankers and market analysts fear emergence of a new dollarization wave in the banking sector as the foreign currency accounts enjoy total exemption.

In the current fiscal year’s budget announced on June 6, the government had enforced an advance tax of 0.1 per cent on cash withdrawal exceeding Rs25,000. It is generally believed that the cash withdrawal up to Rs25,000 is tax free. Only the amount that is in excess of Rs25,000 will be subject to tax. For example, if one withdraws Rs30,000, the tax should be recovered on Rs5,000, which is in excess of the permissible amount of Rs25,000. But the banks are charging tax on the entire amount of Rs30,000.

Bank managers argue that the circular issued in this regard by the Central Board of Revenue is vague and does not give any guideline and instructions.

Under the circular, issued by the secretary withholding tax, CBR, a new section 231A has been inserted in the Income Tax Ordinance, 2001, which stipulates that every banking company at the time of making payment of cash withdrawal exceeding Rs25,000 shall deduct the tax at the rate of 0.1 per cent.

Exemption has been given to the federal and provincial governments, foreign diplomatic missions and a person who produces a certificate from the Commissioner of Income Tax that his income during the year is exempt.

Under the procedure laid down in the circular, the banks shall debit the account of the person who draws in excess of Rs25,000 of the tax amount at the rate of 0.1 per cent. It will be payable in a federal account within seven days of the deduction.

In another communication, the secretary (IT policy), revenue division, CBR, clarified that the intention of the law was to discourage cash transactions. This objective will be achieved only through the levy of withholding tax on the account-holder.

The banks are instructed to debit the accounts by an amount equivalent to 0.1 per cent of the payment, every time a cash withdrawal is made.

The circular is not clear if an account-holder who draws cash against more than one cheque in a day that may exceed Rs25,000 will be subjected to tax.

Out of about 30 million account-holders, quite a sizeable number is of those who maintain saving accounts in the banks. The average rate of the return these savers get is less than two per cent. An account-holder is paying Rs2 excise duty on one cheque leaf.

He pays 10 per cent withholding tax on the return that he gets, which is less than two per cent. The levy of zakat on the profit has now ceased to be compulsory and the account-holder has been given option.

Against about 30 million account-holders, there are in all about 68,000 borrowers. Of these, 6,000 borrowers are from the elite class. They are big business, serving and retired officers of civil and armed services, and big feudals who had been getting and continue receiving the benefits of write-offs and restructuring of their loans.