The Central Board of Revenue (CBR) has announced that the 0.1 percent withholding tax will not be applicable on the withdrawal of cash from the foreign currency accounts. The CBR on Thursday issued a clarification to Dr Ikramul Haq, Lahore Law House, Lahore on the issue of 0.1 percent levy on banks withdrawals' under new section 231A of the Income Tax Ordinance 2001.
According to the CBR's clarification, since the intent of law is to discourage cash transactions, this objective would be achieved only through levying of withholding tax on the account holders. Therefore, the banks are being instructed through a separate circular to debit the accounts by an amount equivalent to 0.1 percent of the payment, every time a cash withdrawal is made.
As regards withdrawals from foreign currency accounts, the new withholding tax provision would not be applicable. Therefore, the question of conversion of currency at the time of withdrawal does not arise, it added.
Presently, section 231A of the Ordinance 2001 does not specify whether the cash withdrawals from foreign currency accounts will be exempted from 0.1 percent tax or not. However, in the light of this clarification, it is evident that no withholding tax would be charged on the withdrawals made from foreign currency accounts.
Chairman CBR has recently said that levy of 0.1 percent withholding tax on cash withdrawals from banks of amounts exceeding Rs 25,000, is a move to broaden the tax-base. However, this tax will not be applicable on drawing cash up to Rs 25,000 and it would be calculated on the amount above the limit of Rs 25,000.
It would not encourage people to transfer money through "Hundi or Hawala" sources because the rate of tax is very nominal whereas there is high risk involved in transfer of money through illegal channels as compared to legal banking channels. Secondly, the people have to pay some amount to use "Hawala" for transfer of money, which is much higher as compared to the proposed tax. However, it is a revenue measure and banks will not be asked to give transaction details of their clients and taxpayers will be entitled to adjustment of this tax.
The Central Board of Revenue (CBR) has clarified that a new Section 231A has been inserted in the Income Tax Ordinance, 2001, which stipulates that every banking company at the time of making payment of cash withdrawal exceeding Rs.25,000 would deduct tax at 0.1 percent.
Advance tax under this section would not be collected in case of cash withdrawals made by the federal government or a provincial government; a foreign diplomat or diplomatic mission in Pakistan and a person who produces a certificate from the commissioner of income tax that his income during the tax year is exempted.
The provisions of this section would be effective from July 1, 2005.
The tax deducted would be payable in the federal government account within seven days of such deductions.
The CBR has requested all the banking companies to immediately issue instructions to all their branches to start collection of tax under Section 231A of the Ordinance w.e.f. July 1, 2005.
The banks would recover the amount of income tax at the rate of 0.1 percent whenever cash withdrawal of over Rs.25,000 from rupee accounts is made.
The amount of tax would be recovered from a person maintaining the account with the bank, by debiting the account from which the cash withdrawal of amount exceeding Rs.25,000 is being made. However, the person presenting the cheque or withdrawing the amount would be paid in full.
Failure to comply with this legal obligation would render the banks liable to be treated in default under Section 161 of the Income Tax Ordinance, 2001, the CBR added.
The CBR has also clarified that the provision of Section 153 of Income Tax Ordinance, 2001 and the corresponding tax rates have undergone a major change by the Finance Act, 2005. Effective July 1, 2005, the rate of withholding tax on execution of all sorts of contracts is uniform. All the withholding tax agents, in particular, government and semi-government departments and organisations, autonomous bodies, corporations, companies, foreign contractors, foreign consultants, consortiums and joint ventures, are advised to deduct tax at the rate of 6 percent of the gross amount of payments made on or after July 1, 2005 irrespective of the fact that the contract was entered or executed before the said date.
It may be clarified that earlier the rate of withholding tax on payments for execution of different types of contracts ranged between 4-8 percent.
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