Factors Behind the Decline

The Large Taxpayers Office (LTO) Karachi attributed the drop to changes introduced under the Finance Act, 2023. One significant amendment was the reintroduction of Section 231AB to the Income Tax Ordinance, 2001. This provision reinstated an advance tax on cash withdrawals, targeting non-compliant individuals earning taxable income but evading the tax net.

Under Section 231AB, banking institutions must deduct an adjustable tax of 0.6% on daily cash withdrawals exceeding Rs 50,000 for individuals not listed on the Active Taxpayers’ List (ATL). The threshold applies to the total cash withdrawn in a single day.

This tax measure, which replaced the now-abolished Section 231A, was reintroduced after being scrapped in 2021. Its reinstatement came with modifications aimed at broadening the tax net and encouraging compliance.

Mixed Implications

FBR officials highlighted that while the drop in tax collection may seem concerning, it reflects a positive trend. The reduction is seen as an indication that more individuals are filing their tax returns to avoid the advance tax. This suggests progress toward the government’s goal of formalizing the economy and expanding the taxpayer base.

During the first four months of FY25, total tax collection from cash withdrawals stood at Rs 3.17 billion, a decline from Rs 3.81 billion in the same period last fiscal year.

Broader Goals

The decline underscores the government’s efforts to improve tax compliance and reduce reliance on indirect taxation. By incentivizing individuals to register as taxpayers, the FBR aims to create a more equitable system while ensuring sustainable revenue collection.

While the drop in tax revenue poses short-term challenges, it aligns with broader objectives of fostering a more transparent and inclusive financial environment, signaling progress toward long-term fiscal stability.