Formalising the economy: FBR looks to promote use of plastic money

Proposes that cash withdrawals over certain limit should be curbed

ISLAMABAD:

Tax authorities have proposed that transactions amounting over a certain threshold should only take place through formal banking channels – online banking or through the use of plastic money.

The recommendation comes as the Federal Board of Revenue (FBR) seeks access to transactions worth Rs6.3 trillion that the tax authority suspects were injected into the informal economy.

The move, meant to enhance dwindling tax revenues as well, was proposed by Rehmatullah Wazir, director general of broadening tax base (BTB) at the Federal Board of Revenue, during a sub-committee of the National Assembly Standing Committee on Finance and Revenue meeting.

In fiscal year 2013-14, Rs6.3 trillion – cash – was withdrawn from banks that we suspect was used for buying properties, hawala and hundi purposes among other informal commercial and business activities, said Wazir.

The official said the FBR was making an attempt to access data regarding these transactions but banks remained reluctant in sharing details.

Wazir added that withholding taxes – charged if a customer withdraws cash more than Rs50,000 from a particular bank account during one day – amounted to Rs19.1 billion in the total sum of Rs6.3 trillion. The total of such transactions, including the withholding tax, was Rs6.22 trillion in 2012-13 and in order to arrest the increase, the FBR raised withholding tax rates, said Wazir.

On withdrawal of over Rs50,000, 0.5% of the final amount is deducted by banks on behalf of the FBR.

While the size of such transactions was Rs3.8 trillion in 2009-10, the increase is around 66% in four years’ time.

The FBR’s disclosure underscores the growing size of the informal economy and also the inability of the federal government to arrest this trend.

Meanwhile, the support for the proposal also came through another official. Shahid Hussain Assad, Senior Member Inland Revenues Policy of FBR, also said that any transaction beyond a certain limit should not be allowed without the involvement of formal banking channels.

He said the limit could initially be fixed at Rs200,000 per transaction but, there should be an end to the growing size of the informal economy.

He said major economic activities took place in the informal sector and bank-related restrictions would capture the size of it.

The DG also admitted that the FBR lacked a reliable database and there was a need for effective enforcement mechanisms to better utilise digital data. He said the FBR has so far built a database of 3.7 million people, gathered from business transactions and other commercial activities.

Wazir said that there were 50 million people who directly or indirectly paid income tax but failed to file income tax returns. This means the number of 50 million drastically goes down to 857,000 – a mere 17,000 higher than last fiscal year, said Wazir.

Meanwhile, the FBR revealed that the government was planning to further increase withholding tax rates for non-filers. The government charges withholding taxes on transactions including withdrawal of cash from banks, dividends, profit on debt, property transfer, purchase of vehicles and air tickets.

The FBR also suggested that the government should start market surveys to enhance the tax base and reduce the size of informal economy. The panel backed the FBR’s move.

Published in The Express Tribune, April 24^th,  2015.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.