Tax on bank transactions

Govt is trying to improve next year’s revenue collection numbers by destroying its long-term ability to collect...

We had hoped that after having had a disastrous first year on the taxation front, Finance Minister Ishaq Dar would have, at least, learnt his lesson about not taking tax policy advice from the geniuses that run the Federal Board of Revenue (FBR). We appear to have been dangerously optimistic. The half-baked idea of raising the withholding tax on bank withdrawals of over Rs50,000 from 0.3 per cent to 0.5 per cent has resurfaced yet again. The FBR appears to have made up their minds: they want to tax what they can get without doing any actual work rather than doing their jobs, for a change.

Let us recount the multiple ways this is not a good idea. First of all, it is not implementable in its current form. The proposal calls for the tax to be raised only on people who have not filed their tax returns. But the banks have absolutely no way of knowing who has filed their tax returns and who has not. And the technology systems at the FBR are so laughably terrible that one cannot reasonably hope for tax records to be shared securely with the more than 50 banks in the country. So if the withholding agents — in this case, the banks—– cannot tell who is eligible for the lower rate and who is not, they will tax everyone at the new, higher rate, effectively raising the tax rate on bank transactions.

This bring us to the second, more significant reason as to why this idea makes no sense. According to research conducted by the State Bank, Pakistan has the world’s highest rate of usage for cash as a percentage of the total money supply. In other words, Pakistanis are the least likely in the world to use formal banking channels for financial transactions, leading to a large undocumented economy that is virtually impossible to tax. By taxing transactions in the documented sector, the government is only further encouraging the growth of that undocumented economy. So the government is trying to improve the next year’s revenue collection numbers by destroying its long-term ability to collect taxes. If that is not lunacy, then we do not know what is.

Published in The Express Tribune, May 26^th, 2014.

Like Opinion & Editorial on Facebook, follow @ETOpEd on Twitter to receive all updates on all our daily pieces.