The Federal Board of Revenue (FBR) has explained to the general public that 0.3 percent withholding tax would be deducted on whole amount of cash withdrawn from banks exceeding Rs 25,000. The FBR on Saturday issued income tax circular 9 of 2008 to explain withholding tax under section 231A on cash withdrawals from banks.
The board has clarified that the withholding tax on cash withdrawals from banks is required to be deducted on the whole amount and not the amount exceeding Rs 25,000. Several communications have been received in the Board seeking clarification regarding application of provisions of Section 231A of the Income Tax Ordinance 2001, with reference to paragraph No 26 of Circular No 1 of 2005 (Income Tax) dated July 5, 2005.
The issue has been examined in the Board. Sub-Section (1) of Section 231A read with Division VI of Part IV of the First Schedule clearly provides that tax was to be deducted @ 0.2 percent of the cash amount withdrawn.
In this regard a circular letter of April 2008 was issued by the Board wherein it was clarified that withholding tax on cash withdrawal under the provisions of section 231A shall be made on total amount of payment where the said amount exceeds Rs 25000.
The matter was further explained through numerical example under the previous arrangement. If the amount of cash withdrawal was Rs 25,000, nil tax would be deducted; Rs 25,500, Rs 51 tax be withheld and if the amount of cash withdrawal from bank is Rs 30,000, withholding tax of Rs 60 would be deducted by the bank as per previous rate of 0.2 percent applicable prior to budget 2008-2009.
In view of this, it is once again clarified that where cash amount withdrawn exceeds Rs 25,000, tax is required to be deducted on the whole amount and not the amount exceeding Rs 25,000. Earlier explanation offered through paragraph No 26 of circular No 1 of 2005 (Income Tax) of July 2005 and all other instructions/circulars, in contradiction to above clarification may be treated as withdrawn.
The rate of withholding tax under section 231A has been enhanced from 0.2 percent to 0.3 percent, through Finance Act, 2008. The withholding tax on cash withdrawal @ 0.1 percent was introduced through Finance Act, 2005, which is adjustable against final tax. Subsequently, the rate of deduction was enhanced to 0.2 percent in the year 2006.
The tax was imposed to encourage documentation of economy and broaden the tax base. It is also an attempt to encourage payment of tax in advance for adjustment against final tax. It may help to give an idea of turnover and actual value of business. The rate of withholding tax on cash withdrawal from banks has been enhanced to 0.3 percent from July 1, 2008.