RAC for abolition of WHT on cash withdrawals

The Revenue Advisory Council (RAC) has recommended to the Federal Board of Revenue (FBR) to abolish 0.3 percent withholding tax on cash withdrawal from banks in the coming budget for 2011-12. Sources told Business Recorder here on Friday that the issue of withholding tax on cash withdrawal was discussed during the last meeting of RAC.
The RAC has strongly recommended that the FBR should abolish the cash withdrawal from banks. When the FBR had imposed the cash withdrawal on banks, the levy was imposed to encourage documentation of economy and broadening the tax base. The withholding tax on cash withdrawal @ rate of 0.1 percent was introduced through Finance Act, 2005 which was adjustable against final tax. However, it was not a revenue generation measure.
Later, the rate of deduction was enhanced to 0.2 percent in the year 2006. The rate of withholding tax on cash withdrawal from banks was further enhanced to 0.3 percent through Finance Act 2008. The FBR has made it a revenue generation measure which was against the basic policy of introducing the levy.
The FBR has informed the RAC that so far the tax department has collected around Rs 12 billion under this head during current fiscal and it is expected that the FBR will reach the figure of Rs 16 billion by the end of June 30, 2011. If the FBR abolish withholding tax on cash withdrawal from banks on the recommendations of the RAC, the council should provide some alternative measures to generate equal amount of revenue.
At the same time, the FBR is also looking into the budgetary projections and exploring other avenues as alternate sources of revenue in case 0.3 percent withholding tax is withdrawn. However, so far no final decision has been taken on this recommendation of the RAC.
According to sources, a large number of persons including farmers and middlemen carry out business in cash and they are unaware about the procedure to obtain refund of the deducted amount of tax on cash withdrawals from banks. The abolition of 0.3 percent withholding tax on cash withdrawal would encourage people to make more investment in the banks. The money is not coming into the banking system due to several reasons including imposition of such kinds of tax. If the government is able to bring money in the banking system, the increase in the deposit growth in banks would bring the interest rate down.
The individuals should be encouraged to buy T-bills, PIBs and government bonds etc through banks and similar tax treatment should be given as in case of Central Directorate of National Saving (CDNS) ie 10 percent under final tax regime. This would provide even playing field for those who would like to invest in government securities or the products introduced by the CDNS.
The working group on Banking Sector Reforms of the Economic Advisory Council (EAC) had strongly recommended abolition of 0.3 percent withholding tax on cash withdrawal from banks and existing 10 percent withholding tax on bank deposits, National Saving Scheme (NSS) and debt mutual funds may be assessed under normal law.
In its recommendations submitted before the EAC meeting here on Saturday, the working group on Banking Sector Reforms recommended elimination of 0.3 percent withholding tax on cash transactions. In lieu, withholding tax of 10 percent on bank deposits, NSS and Debt Mutual Funds should not to be treated as 'Full and Final' tax liability, working group added.