Tax on Cash Withdrawal in Pakistan

Tax on Cash Withdrawal in Pakistan

Tax on Cash Withdrawal in Pakistan

The Federal Board of Revenue (FBR) in Pakistan has introduced and implemented various measures to increase tax compliance. One of these is the tax on cash withdrawal in Pakistan, specifically targeting non-filers. This policy aims to regulate cash transactions and bring more individuals into the formal economy. In this article, we’ll explore the details of this tax, its implications, and strategies to avoid unnecessary tax deductions.

What Is the Tax on Cash Withdrawal in Pakistan?

Overview of the Policy

The tax on cash withdrawal in Pakistan is a withholding tax applied to transactions exceeding a specific threshold. This tax is primarily targeted at individuals who are not on the Active Taxpayer List (ATL). The aim is to discourage large cash withdrawals by non-filers and promote the use of banking systems for documented transactions.

Why It Was Introduced

The government introduced this policy as part of its cash transaction tax policy to:

  • Broaden the tax net.
  • Monitor undocumented cash flows.
  • Generate revenue by penalizing non-filers.

Who Does the Tax Apply To?

Non-Filers and the Tax Policy

The non-filers cash withdrawal tax applies to individuals who do not submit their income tax returns. If an individual is not listed in the ATL, they are subjected to higher FBR cash withdrawal tax rates compared to filers.

Threshold for Tax Deductions

The tax deduction on cash withdrawal above 50,000 PKR is implemented for non-filers. Banks deduct a percentage (currently 0.6%) as withholding tax from cash transactions that exceed this threshold.

How Does the Bank Cash Withdrawal Tax Work?

Mechanism of Withholding Tax on Bank Withdrawals

Banks in Pakistan are required to deduct a withholding tax on bank withdrawals when:

  • The transaction amount exceeds Rs. 50,000 in a single day.
  • The account holder is not a filer.

This banking tax on withdrawals in Pakistan is deducted automatically and transferred to the FBR.

Applicability for Non-Filers

For Tax on Cash Withdrawal in Pakistan by non-filers, the deducted amount is higher compared to those who regularly file their tax returns. This measure encourages individuals to register with the FBR and comply with tax regulations.

Impact of Tax on Cash Withdrawal in Pakistan

On Non-Filers

The non-filers cash withdrawal tax imposes an additional financial burden on individuals who are not part of the tax system. Non-filers experience:

  • Higher tax liability on large withdrawals.
  • Limited access to banking services without incurring additional costs.

On Businesses

For businesses, particularly those relying on cash transactions, this tax increases operational costs and necessitates a shift toward digital or documented payment systems.

FBR Cash Withdrawal Tax Rates

Standard Rates

The FBR cash withdrawal tax rates currently stand at 0.6% for non-filers. This rate applies to the aggregate of cash amount withdrawn in a single day.

Adjustments Over Time

The FBR periodically revises these rates, aligning them with economic goals and the broader cash transaction tax policy.

Exemptions from the Tax

Who Is Exempt?

Certain entities are exempt from the banking Tax on Cash Withdrawal in Pakistan, including:

  • Individuals listed on the Active Taxpayer List (ATL).
  • Diplomatic missions.
  • Provincial and federal government agencies.

Conditions for Exemption

Exemptions require documentation, such as a certificate from the commissioner or evidence of filing income tax returns.

How to Avoid Cash Withdrawal Tax

File Your Income Tax Returns

The most effective way to avoid the Tax on Cash Withdrawal in Pakistan by non-filers is by filing income tax returns annually and ensuring inclusion in the ATL.

Opt for Digital Transactions

Using digital payment methods such as online transfers or mobile wallets can help bypass the tax on cash amount withdrawn. These transactions are less likely to be subjected to withholding tax.

Split Large Withdrawals

To minimize deductions, account holders can distribute withdrawals across multiple days, ensuring that the amount withdrawn in a single day does not exceed Rs. 50,000.

Criticisms of the Policy

Public Concerns

Many argue that the bank cash withdrawal tax penalizes individuals relying on cash for legitimate purposes. Critics also claim that it discourages savings in banks, leading to:

  • Reduced banking sector participation.
  • Increased reliance on informal financial systems.

Economic Implications

The tax has raised concerns about its potential to hinder small businesses, as cash-intensive operations bear a disproportionate burden of compliance costs.

Comparison with Global Practices

International Examples

Several countries implement similar policies, focusing on withholding tax on bank withdrawals to:

  • Curb money laundering.
  • Monitor large financial transactions.

Lessons for Pakistan

Pakistan can learn from international examples by ensuring transparency, setting reasonable thresholds, and offering incentives for compliance.

Future of Cash Withdrawal Tax Policy in Pakistan

Proposals for 2024-25

The FBR has hinted at revising the cash transaction tax policy in the upcoming budget. Potential changes include:

  • Adjustments to FBR cash withdrawal tax rates.
  • New strategies to encourage compliance among non-filers.

Role of Digital Banking

As digital banking grows, the tax policy may shift to include incentives for electronic payments, reducing reliance on cash-based transactions.

FAQs

What Is the Current Tax Rate on Cash Withdrawals in Pakistan?

The rate is 0.6% for non-filers on withdrawals exceeding Rs. 50,000 in a single day.

Who Implements the Tax?

Banks are responsible for deducting the tax on cash withdrawal in Pakistan and transferring it to the FBR.

Can Filers Avoid the Tax?

Yes, individuals listed in the ATL are exempt from the non-filers cash withdrawal tax.