Protest over WHT

The 0.6 percent withholding tax on all banking transactions is being opposed by traders and some political parties have clearly jumped into the fray giving the levy a distinctly political flavour. Federal Finance Minister Ishaq Dar has accused those political parties supporting the traders of trying to get political mileage out of a decision which is economically feasible as it seeks to widen the tax net - a long standing need of our tax system. No one can argue against the stated objective of the government however there are disagreements on whether this is indeed the objective; in addition, there are growing concerns about the implementation of this levy.
Senior officials of the Federal Board of Revenue (FBR) have acknowledged to Business Recorder on condition of anonymity that the objective of the government in imposing this levy was not quite to widen the tax net but to enhance its revenue which, in Pakistan's context, has implied taxing those already taxed. Not so, argues Ishaq Dar as the levy distinguishes between filers and the non-filers. Those who are filers would have the tax refunded, so argues the Finance Minister and Chairman FBR, and this is where problems in implementation arise. The banking system has no means of determining whether the withdrawal is from an account of a filer or non-filer or in other words the tax would automatically be withdrawn on transactions above 50,000 rupee requiring a request for reimbursement from the FBR. This request would have an implicit cost as it would require hiring the services of an accountant or a tax consultant to file for the refund and, if exporters experience in refunds is any indication of the process in place, a further cost would be incurred to bribe the relevant FBR officer to approve the refund in a timely fashion and then another bribe to ensure that the cheque to that effect is actually issued. Exporters have cited refunds being routinely stuck up as a major source of liquidity problems that have led to lower export revenue for the country - a fact that accounts for the Finance Minister's perpetual drive to borrow from external sources. Thus because the process of refunds is so cumbersome and in numerous instances is a component of the go-low policy in issuing cheques to legitimate exporters (reflective of the government's need for resources given its commitment to the International Monetary Fund to meet a specific budget deficit target) the thinking in the FBR is that much more than the budgeted 35 billion rupees would be generated from this levy.
Another problem with implementation of this levy is that those who are exempt from payment of income tax, notably the farm sector as well as remittance income, would also have to pay the tax and subsequently claim a refund. It is little wonder that remittance growth has slowed down to 5.4 percent during July-August from the 14.4 percent witnessed during the comparable period of last year. Remittances were hitherto the only source of foreign exchange earnings, apart from exports, at no cost to the economy.
Widening the tax net in a country where taxpayers are a very small percentage of the total population is necessary, however, the withholding and sales tax regime consisting of extremely high rates are eroding the income earned of households as well as traders who are already contributing over 200 billion rupees to the federal kitty under withholding tax on imports. Ishaq Dar never tires of arguing in favour of a charter of economy, inexplicable given that even the Charter of Democracy (CoD) was in abeyance when either of the two signatories deemed it politically expedient; but surely he must accept that in an established democracy it is the different economic policies of different parties that attract voters. And besides the needs of the economy constantly shift from year to year and any agreement today is unlikely to remain relevant in future.
The IMF Board's meeting where the release of the next tranche under the 6.64 billion dollar Extended Fund Facility would be approved is yet to take place and there is a strong perception within the country that the government is in no position to either reduce the levy or indeed to take back its decision as this may very well be a pre-tranche release condition. Any attempt to withdraw the levy before the Board meeting would imply, as per the agreement with the Fund, an alternate revenue source that would have to be approved by parliament and may well delay the tranche release.