Potential Tax Hike for Non-Filers: Withholding Tax on Cash Withdrawals May Increase

Pakistanis who are not registered as active taxpayers (non-filers) may soon face a higher withholding tax on bank cash withdrawals. The Federal Board of Revenue (FBR) is considering raising the current rate from 0.6% to 0.9% as part of its budget proposals for the 2024-25 fiscal year.

Understanding Withholding Tax on Cash Withdrawals:

This tax applies specifically to non-filers who withdraw more than Rs 50,000 from their bank accounts in a single day. The FBR deducts this tax at the source (the bank) with the intention of encouraging tax compliance and ultimately increasing government revenue.

Why are Some People Non-Filers?

There can be several reasons why someone might not be registered as an active taxpayer. Here are a few common scenarios:

  • Below Tax Threshold: Individuals whose income falls below the minimum taxable limit are not required to file tax returns.
  • Lack of Awareness: Some people may simply be unaware of their tax filing obligations.
  • Informal Economy: Individuals working in the informal sector may not register for taxes due to the nature of their work.
  • Deliberate Non-Compliance: In some cases, people may intentionally avoid filing taxes to evade their tax liabilities.

Becoming an Active Taxpayer:

If you are a non-filer and want to avoid the potential increase in withholding tax, you can register as an active taxpayer with the FBR. The registration process is relatively straightforward and can be completed online or at designated FBR offices. Once registered, you will be issued a National Tax Number (NTN), which allows you to file tax returns and benefit from various tax exemptions.

The Impact of Withholding Tax:

The FBR’s data reveals the significant potential of this tax for revenue generation. In Karachi alone, withholding tax from cash withdrawals has generated Rs 10 billion in the first 10 months of the current fiscal year. This highlights the effectiveness of this tax as a revenue tool.

The Mechanism Explained:

The withholding tax on cash withdrawals is levied under Section 231AB of the Income Tax Ordinance, 2001. It applies to all non-filers withdrawing more than Rs 50,000 in a single day, including transactions made through ATMs and credit cards. While the tax is deducted at the time of withdrawal, it is considered an advance payment adjustable against your annual tax liability. This means you can potentially claim it back when you file your tax return.

Who is Exempt?

There are certain exemptions to the withholding tax. These include withdrawals made by:

  • The federal or provincial government
  • Foreign diplomats
  • Diplomatic missions in Pakistan
  • Individuals presenting a certificate from the Commissioner stating their income for the tax year is exempt

The Proposed Increase and its Implications:

The proposed increase in withholding tax from 0.6% to 0.9% reflects the government’s strategy to enhance revenue collection and achieve fiscal stability. By targeting non-filers and encouraging them to become compliant taxpayers, the FBR aims to broaden the tax base and reduce reliance on indirect taxes.

Looking Ahead:

As budget discussions progress, this proposed hike is likely to be a major talking point, with potential consequences for banking transactions and broader economic activity. Stakeholders and policymakers will be closely monitoring the impact of this measure on revenue generation and taxpayer behavior. The final decision on the withholding tax rate will be revealed in the upcoming budget, highlighting the government’s approach to balancing fiscal needs with economic growth and stability.

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