Karachi, July 07, 2023 (PPI-OT): Reinstating tax on cash withdrawals to invite higher cash in circulation

Withholding Tax (WHT) on cash withdrawals, a practice witnessed in previous years, has been reinstated by the government in the FY24 Budget, where non-filers would be charged 0.6% tax on value of cash withdrawal of Rs50,000 and more.

While prima facie the measure is aimed at promoting documentation, the previous incidence of the tax ending up having the opposite impact where it led to lower number of transactions routing through the banking system and immaterial impact on tax collection or increase in tax filers.

Another adverse impact of the tax expected to repeat in the current incidence is increased currency in circulation which went from an already high 24% to 30% in a span of five years.

FY24 Budget reinstates tax on cash withdrawal

Withholding Tax (WHT) on cash withdrawals, a practice witnessed in previous years, has been reinstated by the government in the FY24 Budget, where non-filers would be charged 0.6% tax on value of cash withdrawal of Rs50,000 and more. To recall, 0.6% of WHT was applied on all non-cash banking transactions (filers and non-filers included) in FY16 Budget. Over the years the rate and the treatment for filers and non-filers was altered multiple times, where it was abolished for filers

in 2019. Subsequently in 2021, the tax was abolished altogether but is being reintroduced for non-filers effective July 1, 2023.

Since the application of the said measure, cash in circulation witnessed a spike, remaining at relatively higher levels to date. Currency in circulation rose from ~24% to 30% in a span of 4 – 5 years. As the measure this time comes in similar lines compared to previous application, it is hence expected to further increase currency in circulation in the near future.

Measure likely to have adverse implications for

documentation

These measures have increased the transaction cost for non-filers, leading to non-

filers avoiding banking channels to some extent. As per an SBP report that

Analyses the effect of this measure in detail, the WHT brought immaterial improvement to tax collection or to documentation. On the contrary it led to reduction of banking transactions. As per the report, the number of non-filers remained high around 70% of total registered income tax payers in FY16 as it only increased number of income tax filers and not sales tax filers, who are likely to have a higher impact of entering the tax net.

On the other hand, a notable decline in pace has also been observed in Private sector deposit holders, where currency in circulation has outpaced the former. The SBP report also indicates private business deposits declining from 28% to 25% after imposition of the WHT, contrary to its objective – discouragement of the cash economy.