The Federal Board of Revenue (FBR) has proposed a hike in withholding tax (WHT) on cash withdrawals from banks for non-filers of income tax returns. This move aims to generate additional revenue and potentially nudge individuals towards tax compliance.
Current Scenario:
Presently, non-filers withdrawing over Rs. 50,000 in a single day through credit cards or ATMs are subject to a 0.6% WHT. This tax was reintroduced in the Finance Act 2023 after a period of exemption.
Proposed Increase:
The FBR proposes raising the WHT rate on cash withdrawals by non-filers from 0.6% to 0.9%. This increase is estimated to generate an additional Rs. 15-20 billion in revenue for the government during the 2024-25 fiscal year.
Rationale Behind the Proposal:
The proposal aligns with the government’s strategy to encourage tax filing and broaden the tax base. Non-filers represent a significant portion of the population, and this measure aims to incentivize them to formally declare their income.
Impact on Non-Filers:
Non-filers withdrawing cash above the Rs. 50,000 threshold will see a slightly higher tax deduction at the source. This could potentially discourage large cash withdrawals or encourage individuals to file tax returns to avoid the WHT.
Arguments for the Increase:
- Increased Revenue: The additional tax revenue can be used for government programs and infrastructure development.
- Discourages Cash-Based Economy: A higher WHT on cash withdrawals could incentivize greater use of digital transactions, promoting a more transparent financial system.
- Encourages Tax Compliance: The proposal might nudge non-filers towards filing tax returns to avoid the WHT on future cash withdrawals.
Arguments Against the Increase:
- Burden on Low-Income Individuals: Those who rely on cash for daily needs and may occasionally exceed the Rs. 50,000 limit could face a higher tax burden.
- Potential for Tax Avoidance: Individuals might resort to alternative methods for accessing cash, such as splitting withdrawals into smaller amounts to avoid the WHT.
- Discourages Formal Financial Inclusion: The higher tax might discourage some individuals from entering the formal banking system altogether.
International Context:
Many countries utilize withholding taxes on various transactions, including cash withdrawals. However, the specific rates and exemptions can vary depending on the nation’s economic situation and tax policies.
Looking Ahead:
The FBR’s proposal is currently under discussion with the International Monetary Fund (IMF). The final decision on the WHT increase and its specific implementation details will be announced in the upcoming budget.
Additional Considerations:
- The effectiveness of this measure will depend on its implementation alongside other tax reform initiatives.
- Strategies to ease the tax filing process and educate citizens on the benefits of tax compliance could be crucial for long-term success.
- Monitoring the impact of the WHT increase on cash withdrawal behavior and tax filing trends will be essential for evaluating its effectiveness.
The FBR’s proposal to raise withholding tax on cash withdrawals for non-filers aims to generate revenue and encourage tax compliance. While the potential benefits exist, it’s important to consider the potential drawbacks and ensure the implementation is well-balanced. Evaluating the impact of this measure alongside broader tax reforms will be key to achieving the desired outcomes for Pakistan’s fiscal health.
