Govt may raise WHT on cash withdrawals above Rs50,000 for non-filers

KARACHI: The government may raise withholding tax (WHT) on cash withdrawals above Rs50,000 for non-filers from 0.6 per cent to 0.9 per cent in the upcoming budget in a bid to help meet its revenue target, a move which analysts say could discourage non-filers from depositing their money in banks.

On June 7, the government will unveil the budget for the fiscal year 2024-25, which will be crucial in moving Pakistan closer to securing a fresh, longer-term bailout from the International Monetary Fund (IMF).

The staff-level agreement with the IMF is expected to be formally announced by the end of June or the beginning of July once sufficient compliance with prior actions and amendments in certain tax laws through finance bill 2024–25 is ensured.

The government aims to raise the tax rates on non-tax filers to widen the tax base. The most likely sectors to be taken into account include vehicle registration, buying and selling of real estate, and cash withdrawals from banking chan-nels. These steps should result in an additional Rs30–40 billion in tax revenue.

According to a report on the budget for FY25 released on Saturday by Topline Securities, the anticipated move to raise the withholding tax on cash withdrawals above Rs50,000 in a single day from the bank account of the non-filers may lead to a rise in the amount of currency in circulation (CiC) and an additional Rs15–20 billion for the government in FY25.

“This is likely to lead to a slight decline in banking transactions and will be slightly negative for the sector,” it said.

A report from Arif Habib Limited thinks this likely move will deter the non-filers from depositing their money in banks.

There is a decline in the CiC growth. The CiC decreased by 2.3 per cent to Rs8.937 trillion so far this fiscal year, according to figures from the State Bank of Pakistan. The alluring interest rates banks offer on savings accounts are the main cause of the drop in CiC. The growth in banking sector deposits, which rose by 21.3 per cent year-on-year to Rs28.416 trillion in April, is what caused the decline in CiC.

In the upcoming budget, the banks are also anticipated to face increased taxes on the lower advance-to-deposit ratio (ADR). The effective tax rate for the banking industry is now 49 per cent and includes both corporate and super taxes. In 2024, banks will be subject to additional taxation of 10 per cent if the ADR is between 40 and 50 per cent, 16 per cent if the ADR is less than 40 per cent, and no additional tax if the ADR is more than 50 per cent. This additional tax will apply to income from federal government securities.

“Although this tax was exempted for one year, ie, 2023, as announced in the FY24 budget, however, we believe it will not be exempted for 2024 in the upcoming FY25 budget,” said Topline report.

“This ADR tax is widely anticipated by the industry, and provisions have already been made; therefore, it is neutral for the sector,” it added. Banks’ investments increased to Rs27.282 trillion in April, a 38.5 per cent year-on-year increase.

There has been a decrease in financing to the private sector as a result of historically high interest rates and the gov-ernment’s constant need for cash from banks.

Banks’ advance-to-deposit ratio stood at 42 per cent in April, compared with 52 per cent a year earlier.

The investment-to-deposit ratio clocked in at 96 per cent in April 2024. That compared with 84 per cent in the same month last year.

Taxing income from Market Treasury Bills (MTBs) and Pakistan Investment Bonds (PIBs) may also be considered in light of the government’s increasing borrowing from banks through the sale of MTBs and PIBs, as well as the notable growth in bank investment income. Analysts predict that this will hurt the banking industry’s profitability.

The government levied a 10 per cent super tax on the banking industry in the budget FY23, bringing the overall tax rate to 49 per cent. Given the financial difficulties, it appears that the super tax will persist in the FY25 budget. Pakistan’s banking sector is sound, resilient, and highly profitable. In 2023, banks reported a staggering 90 per cent in-crease in net profit.