Traders start preferring cash transactions, informal channels

Hundi and Hawala used as alternatives to bank dealings to avoid WHT

FAISALABAD: The defiant business community has found a way to avoid the 0.3% withholding tax (WHT) on banking transactions carried out by those who have not filed their income tax returns.

The business community has started doing business either in cash or through some informal means.

Many wealthy executives have hired security guards to protect millions of rupees in cash that changes hands on a daily basis in Faisalabad, the country’s industrial hub. They transfer cash from one place to another like bank’s cash-carrying vehicles, according to sources in business circles.

In the budget for 2015-16, the federal government imposed 0.6% WHT on all banking transactions above Rs50,000 for those who haven’t filed their income tax returns. After a strong protest by the businessmen, the government reduced the rate to 0.3% till September 30, urging the non-filers to come into the tax net to avoid the levy.

Read: Withholding tax: Traders to go on strike

But the businessmen are not content, even with the reduced 0.3% WHT, and have already staged shutter-down strikes in protest early this month.

They have begun to avoid dealing with banks. The State Bank of Pakistan, however, has recently stated that it did not find any reduction in the deposit base of commercial banks in July.

Most of the traders are beginning to prefer cash transactions or making use of informal channels such as Hundi or Hawala to transfer money from one city to another.

Faisalabad is the major hub of trading which, either directly or indirectly, is intricately connected to the rest of Pakistan. Before the imposition of WHT, the traders were doing business on credit basis by providing post-dated cheques. But with the imposition of WHT, the wholesalers along with small and medium level manufacturers are refusing to accept post-dated cheques or online transactions to avoid the 0.3% levy.

The Hundi or Hawala system is the business of mutual trust that does not involve any record of the transaction. People running this system charge nominal sums to compete with banks, said sources.

Within Faisalabad, the business deals are gradually shifting to cash while inter-city transactions are carried out through Hawala.

The bank branches that were dealing with yarn market traders have witnessed a reduction in business-related transactions, said a bank official on condition of anonymity.

Read: The withholding tax saga

The bank official said most of the businessmen have withdrawn their cash from banks. The amount of online transfers, pay orders and other services also fell after the imposition of WHT, he added.

A retailer said the wholesalers now demand cash and refuse to accept cheques, adding those wholesalers who still deal with banks receive money equivalent to 0.3% from the retailers.

Published in The Express Tribune, August 15^th, 2015.

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