No WHT on banking transactions: Tax authorities to incur loss of Rs28 billion

KARACHI: The elimination of withholding tax on certain banking transactions would cost the tax authorities around Rs28 billion annually, besides hampering the efforts of compliance through the filing of income tax returns.

The Finance Bill, 2021 has proposed to delete around 12 different provisions of withholding taxes, which is aimed at providing relief to the masses.

There are around four provisions where banks are responsible to collect withholding tax on transactions. According to the calculation based on the fiscal year 2019/20, the Federal Board of Revenue (FBR) had collected around Rs28 billion as withholding tax from these provisions.

The bill has proposed to delete Section 231A, 231AA, 236P, and 236Y of the Income Tax Ordinance, 2001. The FBR collected Rs15.17 billion under Section 231A, which is related to cash withdrawal from the banking system.

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The collection of Rs162 million was made under Section 231AA, which is related to banking instruments. An amount of Rs11.57 billion was collected on the banking transactions other than cash made under Section 236P. Similarly, the tax authorities collected Rs981 million from the transactions made through debit and credit cards under Section 236Y.

These sections were introduced in the past in order to put a tax burden on the banking transactions to ensure tax compliance through the filing of income tax returns.

The withholding tax was imposed on cash withdrawal from the banking system under Section 231A, which was introduced through the Finance Act, 2005. The deducted tax was adjustable against the total tax liability on the filing of income tax returns. The tax with different rates remained applicable on income tax return filers and non-filers till 2019. However, through the Finance Supplementary (Second Amendment) Ordinance, 2019, the withholding tax on the income tax return filers was abolished.
Meanwhile, Section 236P was introduced through the Finance Act, 2015, and under this section, withholding tax was levied at 0.6 percent only on income tax returns non-filers.

Most recently, Section 236Y was introduced through the Finance Act, 2018 to impose withholding tax on the transactions made through debit and credit cards. The implementation of these measures resulted in a phenomenal increase in income tax returns filing. The total number of income tax returns increased from 1.84 million in 2017 to a record 3.2 million in 2020.

Sources in the FBR said the proposed elimination of withholding tax provisions would not only reduce the revenue collection but also affect the income tax returns filing.

An official of the Inland Revenue said due to the mandatory conditions of returns filing to avail of adjustment or refund of deducted withholding tax, several people were making compliance by filing annual returns of income.

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