LAHORE: The imposition of withholding tax on banking transactions has resulted in the slowdown of bank deposit growth and forced medium- and small-sized banks to offer returns above the market rates to raise deposits, said both banking and Federal Board of Revenue (FBR) sources.
In Pakistan where rates of savings and investment are already much below the desired threshold, such negative latent policy biases are bound to adversely affect economic growth and development.
The banking sector sources are of the view that the imposition of withholding tax on bank deposits is halting the deepening of the banking services, and that the same is acting against the goal of achieving financial depth. They further said that for the first time since 2009-10 the monetary expansion came more from the currency in circulation than the bank deposit growth as private sector deposits increased by Rs 149.4 billion during July-March FY16 - less than half of the rise recorded during the corresponding period of FY15.
Similarly, they said, the business community also tried to find other modes of payment to avoid it, and particularly retailers and medium-sized businesses started using dollars to make payments while they kept dollars in their bank lockers. Resultantly, surplus liquid funds either flee the country or get invested in the real estate - a dead sector for all practical purposes.
It is also commonly believed in the FBR that excessive application of withholding taxes on the real estate sector has significantly brought down the number of transactions therein causing a definite dent in the aggregate revenue. Thus, Pakistan's official savings rate staying stagnant around 16 percent may also partly be explained in terms of the ruthless imposition of withholding regime in the economic system.
The FBR sources said the banking sector has also inflicted a great influence on the Board for being a major contributor to withholding tax. For example, they said, in Tax Year 2016, while the banking sector paid total taxes of over Rs 140 billion, it collected and paid to FBR over Rs 134 billion as withholding tax. Not surprisingly then the sector got away with significant relaxations on their reporting requirements in quid pro quo from the state, they added.
The FBR sources said withholding taxes' contribution which was about 45 percent of total direct tax revenue starts to shoot up at the start of the 1990s due to the introduction of the Presumptive Tax Regime. The contribution of withholding taxes consistently kept climbing up till it touched its historic highest in 1996-97; then steadied at around 60 percent. The curve again starts to get steeper at the start of 2010s and touches a 70 percent mark before again slightly declining at around 2014-15.
Copyright Business Recorder, 2020
Comments
Comments are closed for this article.