According to a report in this newspaper, the State Bank has again asked the government to reconsider the issue of withholding tax on banking transactions for non-filers in the budget for next fiscal year (2017-18), especially for vulnerable groups of population. It has specifically argued that this levy of 4 percent on non-filers and 0.3 percent on filers adversely affects the deposit base of banks and this was a matter of concern because Pakistan has one of the lowest saving rates as a percentage of GDP among regional countries and imposition of advance tax on banking transactions is further discouraging the public from using banking channels for their financial transactions. Additionally, withholding tax on banking transactions is creating problems for the low income groups such as pensioners, retirees, farmers, students, etc, who fall below the taxable threshold limit yet they are charged the higher non-filer rate. Also, the salary of an employee is subject to deduction of tax at source and tax applicable on the entire salary is deducted by the employer for deposit in the government treasury. At the time of withdrawal of salary, tax is again imposed which amounts to double taxation and is grossly unfair. Considering all the factors, SBP has proposed to remove section 236 and if that is not possible, exemption should be provided to students, widows, pensioners, salaried class and farmers. In case this is not done, threshold of transfers/transactions should be increased to Rs 100,000.

We feel that the State Bank's proposal on withholding tax on banking transactions is very genuine and needs to be considered seriously by the government. It also needs to be asserted that this is not the first time that such a proposal has been made. Both the banks and the business community have been arguing for the withdrawal of this levy but the government has refused to yield to the advice because of budgetary reasons and to punish the non-filers and force them to be "filers". The government imposed 0.6 percent withholding tax on banking transactions on withdrawal of more than Rs 50,000 in the budget for FY16 which was reduced subsequently to 0.3 percent due to protests of traders. This rate has been raised to 0.4 percent recently. The State Bank's argument to abolish this levy altogether is based on very sound arguments. The saving rate in Pakistan's economy is one of the lowest in the world and this is a great constraint for investment and growth. The government's claim of raising the growth rate to above 5 percent on a sustainable basis in the coming years would turn out to be meaningless if saving/investment rate is not increased to nearly 20 percent or so. The levy of withholding tax on banking transactions certainly discourages the savers and is not helpful for economy. Also, it is a matter of concern that withholding tax is deducted on the withdrawal of deposits held by vulnerable sections of society like widows, pensioners and farmers which is unfair. They cannot claim credit for the deducted amount due to lack of education and knowledge of tax filing. Besides, they are least likely to file the claims for tax deduction due to the fear of harassment by the tax authorities. There could also be certain other negative side effects of the present policy of withholding tax. For instance, the size of cash/informal economy may increase while home remittances through banking channels could also be adversely affected to a certain extent. In our view, it would be much better to improve the efficiency of the tax collecting machinery and apprehend the tax evaders and punish them rather than rely on such minor and inequitable measures to increase the tax revenues of government. We know that this route is hard to tread but this is the only way to go forward in a fair manner and with the honesty of purpose.

Copyright Business Recorder, 2017