A variety of tax proposals are reported to be under consideration of the Ministry of Finance for the Federal Budget to be presented in the last week of this month. One of them is to generate higher level of revenues by enhancing the income tax rate on banking companies and increase in withholding tax on cash withdrawals from banks.
According to a news item in Business Recorder on 27th April 2011, the government was planning to increase income tax rate on banking and insurance companies from 35 percent to 37.5-40 percent in the budget for 2011-12. The argument for raising the tax rate was that the existing rate of 35 percent was quite low as compared to other countries in the region and elsewhere. For instance, income tax rate on banking companies in India and Bangladesh was 43 percent and 45 percent or 8 and 10 percent respectively higher than in Pakistan. Even Egypt had a tax rate of 40 percent on banking companies.
The tax rate on banking companies in Pakistan was lower by 11 percent than in USA where these companies were subjected to an income tax rate of 46 percent. It was also being argued that, despite increasing revenue requirements of the government over the years, the rate on banking companies has not been changed during the last few years. According to another report, the government is also actively considering an increase in withholding tax on cash withdrawals from banks from 0.3 percent to 0.4 percent or 0.5 percent in the upcoming budget and tax authorities are presently working on the revenue impact of such a measure. It may be mentioned that the tax has to be paid on the entire amount if cash withdrawal exceeds Rs 25,000.
While there can be no disagreement that the government has to explore all avenues to maximise the tax revenues in the next budget, we feel that the fiscal authorities of the country need to be aware of the negative implications of the proposed measures and also concentrate much more on untaxed or exempted sectors of the economy to broad-base the tax system and introduce equity in the tax regime. Besides, FBR, through upward adjustment in tax rates on banking companies, etc, appears again to be more concerned about convenience of tax collection rather than raising revenues through confronting the vested interests which need to be brought under the tax net. Coming specifically to the proposed increase in income tax rate on banking companies, a question could justifiably be asked about the reasons which had earlier prompted the government to gradually reduce these rates. At that time, it was argued that the banking industry was a key industry and, therefore, needed all the encouragement to play its crucial role in the economy of Pakistan. Such thinking had forced the authorities to bring the banking companies at par with other industries for tax purposes or, in other words, the step was necessitated to provide a level playing field for various economic agents. Since the tax rate on banking companies was reported to be still somewhat higher than other industries, there seems to be no justification now for raising the tax rate on banking companies and widen the disparity further.
We feel that the argument advanced earlier to reduce the tax rate on banking companies to a level at par with other industries has neither lost its appeal nor its validity. So far as comparison with other countries is concerned, the ground realities and tax culture in each country could be different and, therefore, there is no need to blindly copy the approach other countries have taken.
The proposal for an increase in withholding tax on cash withdrawals is even more intriguing. This tax was introduced through Finance Act, 2005 at the rate of 0.1 percent which was raised to 0.2 percent in 2006 and further to 0.3 percent through Finance Act, 2008. The tax was purportedly imposed to encourage documentation of the economy and broaden the tax base. The measure, of course, has failed to achieve these stated objectives but definitely has punished the savers and, may have, indirectly, contributed to some decline in the saving rate of the economy, which is unfortunate. It may be mentioned that depositors are already getting a very raw deal from the government and the banks.
They have to pay withholding tax on interest income, inflated service charges and Zakat. Banks also pay very low interest rates on saving deposit accounts. Any increase in withholding tax on cash withdrawals would not only discourage the depositors further but could increase cash transactions in the economy and curb the banking habit. In short, while we realise the compulsions of the government to raise more revenues, the objective may be achieved after analysing all the pros and cons thoroughly. The emphasis, in particular, should be on ensuring equity by working harder and confronting the evaders rather than taking the convenient route of increasing the tax rates on those who cannot raise enough voice to protest against an unfair system.
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