Steps in the right direction

KARACHI: The government in federal budget 2021-22 has proposed to eliminate collection of withholding tax (WHT) on cash withdrawals and banking transactions, which was seen by analysts and bankers as the right step towards declining currency in circulation and boosting financial inclusion in the country.

“The withholding tax (WHT) on 12 sectors, including banking, will be withdrawn,” Finance Minister Shaukat Tarin said in his speech while presenting the budget for fiscal year 2021/22 on Friday.

That means WHT of 0.3 percent for non-tax filers on transactions above Rs50,000 would be removed.

“Focus towards reducing currency in circulation [CiC] and cash transactions with elimination of WHT on cash withdrawals and banking transactions. Banking sector to benefit with more inflows into the banking system,” said Samiullah Tariq, head of research at Pak-Kuwait Investment Company.

The CiC increased by Rs672.6 billion or 11.0 percent in July-April FY2021, according to the figures from Pakistan Economic Survey.

Currency-to-M2 ratio stood at 30.2 percent in July-April FY2021, compared with 30.5 percent in the same period last year due to enhanced uses of digital modes of payments, which have contributed towards the lower demand for holding cash, it said.

The collection of WHT on banking instruments, tax on banking transactions other than through cash and tax from persons remitting amounts abroad through credit or debit or prepaid cards will be abolished, said the budget document, containing its salient features.

“Initial thoughts are positive,” said Saad Hashemy, an executive director at BMA Capital.

“…..WHT on banking transactions are also recommended to be removed. This will help increase financial inclusion as fewer the transactional costs, the more willing people will be for using the banking system,” Hashemy said.

Mustafa Mustansir, head of research at Taurus Securities Limited said WHT withdrawals would be positive in the way they would generate additional transaction volume for banks.

“So, it will help in a way in increasing their fee incomes. It will also help banks operationally as collecting these WHT came with an administrative cost to collect and report them also.”

However, the imposition of four percent super tax on banks is still continuing.

The purpose of the super-tax was to generate monies for internally displaced persons etc, the situation which has subsided almost entirely in the country. However, the government continues to collect the levy, and has since February 2021, made it mandatory for banks to continue paying the same on an ongoing basis.

The budget accompanies other measures announced by Finance Minister Tarin, including providing mark-up subsidy to Naya Pakistan Housing scheme, and interest free loans to farmers for purchase of farm equipment and tractors.

Moreover, the low-interest loans would be given for low-cost housing.

“The elimination of WHT on cash withdrawals and banking transactions would have positive implications for bank deposits,” said a senior banker.

“The financing for the announced subsidies and other cheaper loans is expected to be generated from banks and non-bank sources.

The government’s increasing focus on housing will help boost mortgage financing,” the banker added.

Other tax measures such as federal excise duty exemption and sales tax reduction to 12.5 percent from 17.5 percent on 850cc and below vehicles would also result in increased auto loans, he added.

The government has also announced documentation measures like

tax credit on installation of point of sale (POS) machines, the document containing salient features for the fiscal year 2021/22 budget showed.

Analysts said the government aims to bring retailers into the tax net. This decision might result in higher wallet payment transactions after installation of POS machines. This too would be positive for banks as retailers would move to the banking channel for different transactions.