Income Tax Ordinance, 2001 through the Finance Act 2023, specifically focusing on the reintroduction of tax collection on cash withdrawals from Non-ATL (Active Taxpayer List) persons by banks.
The recent Income Tax Circular 2 of 2023 sheds light on these changes and their implications for individuals making cash withdrawals exceeding Rs. 50,000 in a single day through credit cards or ATMs.
We will explore the newly introduced section 231AB and the procedures for deducting advance adjustable tax at the rate of 0.6 percent, as well as exemptions and the rationale behind these measures.
The Federal Board of Revenue (FBR) has introduced Income Tax Circular 2 of 2023 to provide clarity on the amendments made in the Income Tax Ordinance, 2001 through the Finance Act 2023.
Among these amendments, the Finance Act 2023 has reinstated tax collection on cash withdrawals from Non-ATL persons by banks. This move is part of the government's efforts to enhance tax compliance and revenue collection.
Section 231AB: Withholding Tax on Cash Withdrawals
The newly introduced section 231AB mandates every banking company to deduct advance adjustable tax at the rate of 0.6 percent from individuals whose names are not listed in the Active Taxpayer List at the time of making a cash withdrawal.
This withholding tax applies to the sum total of cash withdrawals, which includes cash withdrawals made in a single day through credit cards or ATMs that exceed the threshold of Rs. 50,000.
Coverage and Tax Calculation
The Income Tax Circular clarifies that the withholding tax on cash withdrawals is applicable not only to cash withdrawals made from banks but also to those made through credit cards or ATMs.
If the aggregate amount of cash withdrawn in a single day exceeds Rs. 50,000, the tax is required to be deducted on the entire amount withdrawn.
Therefore, if an individual makes multiple cash withdrawals on the same day, and the total exceeds the specified limit, the withholding tax will be levied on the entire sum.
Adjustable Tax and Exemptions
The withholding tax on cash withdrawals is considered an adjustable tax against the person's tax liability for a particular tax year. It means that the tax amount deducted at the time of cash withdrawal can be adjusted against the individual's final tax liability for that year. However, there are exemptions to this rule. The tax shall not be deducted in the following cases:
- Withdrawals made by the federal government or a provincial government.
- Withdrawals made by a foreign diplomat or a diplomatic mission in Pakistan.
- Withdrawals are made by a person who produces a certificate from the commissioner stating that their income during the tax year is exempt.
Increase in Withholding Tax Rates for Non-Resident Persons
The Finance Act 2023 has also increased the withholding tax rates for non-resident persons, particularly those receiving payments through debit/credit cards. The previous rates were 1% for ATL persons and 2% for Non-ATL persons.
However, these rates had a substantial impact on foreign exchange outflow from the country. To discourage unnecessary outflow of foreign exchange reserves, the new withholding tax rates under section 236Y have been increased through Finance Act 2023 as follows:
- ATL Persons: Withholding tax rate increased from 1% to 5%.
- Non-ATL Persons: Withholding tax rate increased from 2% to 10%.
Rationale and Benefits
The rationale behind these changes is to encourage tax compliance and broaden the tax base by including Non-ATL individuals in the tax net.
By levying a withholding tax on cash withdrawals, the government aims to ensure that all eligible individuals contribute their fair share of taxes.
Additionally, increasing the withholding tax rates for non-resident persons helps conserve foreign exchange reserves, promoting economic stability.
Income Tax Circular 2 of 2023 introduces significant amendments in the tax regime concerning cash withdrawal withholding tax for Non-ATL persons. Section 231AB requires banking companies to deduct 0.6 percent tax on cash withdrawals exceeding Rs. 50,000 in a single day.
The tax is adjustable against the individual's tax liability for that year. Furthermore, the Finance Act 2023 increases withholding tax rates for non-resident persons, which serves as a measure to safeguard foreign exchange reserves. These changes contribute to Pakistan's economic growth and strengthen its tax collection system.
