Pakistan Proposes Higher Withholding Tax on Cash Withdrawals for Non-Tax Filers

The Federal Board of Revenue (FBR) has proposed an increase in withholding tax (WHT) on cash withdrawals by non-filers of income tax returns. This proposal is part of ongoing discussions with the International Monetary Fund (IMF) and aims to generate additional revenue for the government.

Current Scenario:

• Non-filers withdrawing over Rs. 50,000 in a single day through banks, credit cards, or ATMs currently face a 0.6% WHT.
• This tax was reintroduced in the Finance Act 2023 as part of efforts to discourage individuals from operating outside the formal tax system.

Proposed Changes:

• The FBR proposes raising the WHT rate from 0.6% to 0.9% for non-filers.
• This increase is expected to generate an additional Rs. 15-20 billion in revenue during the 2024-25 fiscal year.

Rationale Behind the Proposal:

• The government aims to encourage individuals to file income tax returns and contribute to the formal economy.
• Increased tax revenue can be used to fund public welfare programs, infrastructure development, and other government initiatives.

Potential Impact:

• The proposed increase could discourage non-filers from making large cash withdrawals, potentially pushing them towards traceable digital transactions.
• However, it may also lead to inconvenience for non-filers who rely on cash for daily transactions.

Exemptions from WHT on Cash Withdrawals:

• The WHT on cash withdrawals is not applicable to: Federal or provincial governments Foreign diplomats or diplomatic missions in Pakistan Individuals with a certificate from the Commissioner stating their income is exempt for the tax year

Similar Measures in Other Countries:

• Many countries implement WHT on various financial transactions, including cash withdrawals, to broaden their tax base and encourage tax compliance.
• The specific rates and exemptions may vary depending on the country's economic and tax policies.

Looking Ahead:

The FBR's proposal is currently under discussion with the IMF and may be revised before being finalized in the upcoming budget. Whether or not the proposed increase materializes and its ultimate impact remain to be seen.

Alternative Solutions to Encourage Tax Filing:

• Beyond raising WHT, the government could consider: Simplifying the tax filing process Offering tax breaks and incentives for new tax filers Raising awareness about the benefits of filing taxes

Enhancing Tax Administration:

• Alongside encouraging tax filing, the government can focus on: Improving tax collection efficiency Addressing loopholes and tax evasion

The FBR's proposal to raise WHT on cash withdrawals for non-filers is a potential step towards increasing tax revenue. However, it is crucial to find a balance between encouraging tax compliance and minimizing inconvenience for citizens. A multi-pronged approach, including simplifying tax filing and improving tax administration, can be more effective in broadening the tax base and strengthening Pakistan's economy.

This article was published at FBR Proposes Increased Withholding Tax on Cash Withdrawals for Non-Tax Filers