Economy tiptoes towards cash to avoid taxation

[Zibago]

Economy tiptoes towards cash to avoid taxation

By Shahbaz RanaPublished: November 3, 2016
50
SHARES
SHARE TWEET

The growing reliance on cash may dent efforts to enhance financial inclusion in Pakistan, which remains one of the lowest in the world, particularly among women. PHOTO: EXPRESS
ISLAMABAD: Pakistan’s economy is making a gradual shift to cash as protection against the government’s taxation policies – a structural change that, according to experts, would lead to low economic productivity and high inflation.

During fiscal year 2015-16, growth in banking sector deposits was far lower than in the previous year while the currency in circulation increased at a much rapid pace, revealed minutes of the last Monetary Policy Committee (MPC) meeting.

Pakistan’s economy is out of danger, says IMF chief

In 2015-16, “the currency in circulation expanded 30.5% as compared to 17.3% a year before, which reflects that private businesses are using cash to settle their transactions,” according to the MPC.

In absolute terms, the currency outside scheduled banks increased from Rs2.555 trillion in 2014-15 to Rs3.334 trillion last year – a net addition of Rs779 billion in a single year.

In the last fiscal year, the federal government imposed a 0.6% withholding tax on all banking transactions worth over Rs50,000 carried out by non-filers of income tax returns in a single day, aimed at increasing revenue collection but without analysing its impacts on the economy. After protests, the government lowered the rate to 0.4%, but people still remain more reliant on cash.

The MPC noted that factors contributing to this trend include “low rate of return on deposits and imposition of withholding tax on banking transactions”.

Pakistan lags behind India, Bangladesh in economic growth: report

The growing reliance on cash may dent global efforts, backed by the United Kingdom, to enhance financial inclusion in Pakistan, which remains one of the lowest in the world particularly among women.

The low return on deposits due to low interest rate environment somehow affected the deposits but the real damage was done by the government’s decision to impose the withholding tax, said Dr Hafiz Pasha, former finance minister. He said that increase in money circulation would lead to high inflation and banks would face problems in lending money to the private sector for expansion.

The currency in circulation-to-deposits ratio, which was 29.3% two years ago, increased to 35.1% last year, according to the International Monetary Fund (IMF) report. This ratio further increased to 37.1% as of September 9, underscoring the economy’s gradual shift towards cash.

The MPC noted that growth in deposits was just 8.7% in the last fiscal year as compared to 12% in fiscal year 2015. However, the deposits of private sector businesses grew by only 1.2% in the last fiscal year, which is considerably low as compared to 9.4% in fiscal year 2015, according to the MPC. The low growth in deposits may also be an indication that households savings are down due to low incomes, said Dr Pasha.

This decline in the deposits of private sector businesses has resulted in the deterioration of the currency in circulation to GDP ratio from 9.3% to 11.3% in just one year.

The withholding tax on cash withdrawals has led to higher-than-usual demand for currency in circulation and lower growth in bank deposits than would otherwise have been the case,” said IMF Resident Representative Tokhir Mirzoev in an emailed response to The Express Tribune.

Asian markets rise again, pounds hits 31-year low

“This highlights the difficulty of widening the tax net in Pakistan. Tax collection, despite witnessing significant improvements over the last three years, is still much below Pakistan’s potential and continued efforts are needed to bring potential taxpayers into the tax net,” he added.

The withholding tax on banking transactions has nullified the efforts towards documentation of the economy, said Dr Ikramul Haq, who is a leading tax expert. He said that people have started avoiding the tax through different means.

While imposing the tax the government had hoped that it would compel the people to file their annual income tax returns. However, the number of filers remained below 1.1 million people, although more than seven million people are paying direct taxes by virtue of over 70 types of withholding taxes.

However, the Federal Board of Revenue earned Rs23 billion by charging 0.4% withholding tax last year – a gain that appears negligible when compared with the adverse implications of cash economy.

“The implementation of the withholding tax, which led to an increase in cash holding, will lead to lower documentation and lower revenues in the longer run,” said M. Ali Kemal, who is an Islamabad-based research economist at Pakistan Institute of Development Economics.

Published in The Express Tribune, November 3rd, 2016
http://tribune.com.pk/story/1218743/avoidance-tactics-economy-tiptoes-towards-cash-avoid-taxation/
Govt answer to it would be increasing indirect taxes again and hurting those in sensitive income groups

Btw many people i know taken their deposits out of banks and are storing them in form of bonds and gold in homes @django @The Sandman @Moonlight @Hell hound @User @Arsalan @WAJsal @Chauvinist

 

[I.R.A]

What else you expect when you have a ******* as your finance minister. He is good at playing with the numbers (believe me it hardly involves any economics) and his idea of increasing the tax base is overburden the existing tax payers and make their life hell. An idiot.

 

[Zibago]

What else you expect when you have a ******* as your finance minister. He is good at playing with the numbers (believe me it hardly involves any economics) and his idea of increasing the tax base is overburden the existing tax payers and make their life hell. An idiot.

HeHe uses the anti poor method of indirect taxation to fill in the numbers we have 50% of our population spending half their earning on food because of high indirect taxation

What else you expect when you have a ******* as your finance minister. He is good at playing with the numbers (believe me it hardly involves any economics) and his idea of increasing the tax base is overburden the existing tax payers and make their life hell. An idiot.

This idiot increased tax on packed milk saying only rich people buy packed milk guess what most milk vendors link prices to packed milk more burden on common folks who the f cares right?

 

[I.R.A]

HeHe uses the anti poor method of indirect taxation to fill in the numbers we have 50% of our population spending half their earning on food because of high indirect taxation


This idiot increased tax on packed milk saying only rich people buy packed milk guess what most milk vendors link prices to packed milk more burden on common folks who the f cares right?

Yeah really who the F cares ............ they are running TV ad these days and one of their achievement mentioned in that ad is "We brought petrol price from PKR 117 to PKR 64" ............... I mean come on they think every other Pakistani is Chay.

All this indirect taxation and Withholding of taxes at source helps them looting the common people and still label them that they don't pay taxes. Taxation law can be seriously 4 to 5 sections only and it can have everyone pay tax.

 

[Zibago]

Yeah really who the F cares ............ they are running TV ad these days and one of their achievement mentioned in that ad is "We brought petrol price from PKR 117 to PKR 64" ............... I mean come on they think every other Pakistani is Chay.

All this indirect taxation and Withholding of taxes at source helps them looting the common people and still label them that they don't pay taxes. Taxation law can be seriously 4 to 5 sections only and it can have everyone pay tax.

well a large number of their voters are chays even some fairly educated ones

We pay tax on every item or service we purchase how are we not paying taxes?
How much more do you wish to exhort from us
Thet didnt even leave eidable goodsgoods and thet lie that we pay no tax only 1% pay tax in Pakistan

 

[Counterpunch]

There always will be measures taken by the business community to avoid tax ( read planning, not evasion)

But by and large the below statement pretty much sums up the mental caliber of the idiots in charge of affairs

"However, the Federal Board of Revenue earned Rs23 billion by charging 0.4% withholding tax last year – a gain that appears negligible when compared with the adverse implications of cash economy"

The same mistake Govt committed in Real Estate sector. Not sure how credible, but a property guru told me that the tax collected from the whole country in lieu of transfers now was less or equal to that collected from transfers in Lahore alone, prior to the draculian Real Estate amendments

 

[I.R.A]

well a large number of their voters are chays even some fairly educated ones

We pay tax on every item or service we purchase how are we not paying taxes?
How much more do you wish to exhort from us
Thet didnt even leave eidable goodsgoods and thet lie that we pay no tax only 1% pay tax in Pakistan

This happens when you literally promise each other "You watch my back I will watch your's" ............ their predecessors left USD 6 billion of reserves only and now they are punishing Awam for it.

 

[Zibago]

There always will be measures taken by the business community to avoid tax ( read planning, not evasion)

But by and large the below statement pretty much sums up the mental caliber of the idiots in charge of affairs

"However, the Federal Board of Revenue earned Rs23 billion by charging 0.4% withholding tax last year – a gain that appears negligible when compared with the adverse implications of cash economy"

The same mistake Govt committed in Real Estate sector. Not sure how credible, but a property guru told me that the tax collected from the whole country in lieu of transfers now was less or equal to that collected from transfers in Lahore alone, prior to the draculian Real Estate amendments

people dont really fancy paying taxes on savings what the hell were they thinking when they passed these laws?
I have seen people now avoiding banks and taking money out of banks to avoid taxes on savings this will only increase with time

This happens when you literally promise each other "You watch my back I will watch your's" ............ their predecessors left USD 6 billion of reserves only and now they are punishing Awam for it.

Jiye jamhoriyat awaam jaye bhar mein

 

[Counterpunch]

well a large number of their voters are chays even some fairly educated ones

We pay tax on every item or service we purchase how are we not paying taxes?
How much more do you wish to exhort from us
Thet didnt even leave eidable goodsgoods and thet lie that we pay no tax only 1% pay tax in Pakistan

I am no expert on tax, but I think Pakistan must have worst tax system. There is double, triple taxation from the salaried class and the ones who are really making big bucks evade taxes with impunity.

Salaried individuals get tax deducted at source through PAYE (Pay As You Earn). Even after that there is taxation on literally everything the person buys using the net off Tax money he earned. A person earning 70-100k per month pays more than one month of his earning in direct taxes per year and God knows how many in indirect taxes through the year

 

[Counterpunch]

people dont really fancy paying taxes on savings what the hell were they thinking when they passed these laws?
I have seen people now avoiding banks and taking money out of banks to avoid taxes on savings this will only increase with time

Government seriously lacks the cost-benefit analysis capability while deploying any new financial scheme. Through RE amendments they literally shot themselves in the feet, as well as the economy.

 

[Zibago]

I am no expert on tax, but I think Pakistan must have worst tax system. There is double, triple taxation from the salaried class and the ones who are really making big bucks evade taxes with impunity.

Salaried individuals get tax deducted at source through PAYE (Pay As You Earn). Even after that there is taxation on literally everything the person buys using the net off Tax money he earned. A person earning 70-100k per month pays more than one month of his earning in direct taxes per year and God knows how many in indirect taxes through the year

We have an anti poor anti middle class system in place
http://www.pakistantoday.com.pk/2015/03/04/business/indirect-taxes-creating-economic-inequality/

 

[Nilgiri]

This is regressive and opposite direction of what should be happening.

 

[I.R.A]

This is regressive and opposite direction of what should be happening.

When you have amnesty schemes and plea bargaining for the tax evaders, defaulters and corrupt in place ...... then everyone else has the right to evade wherever and however he finds fit.

 

[coffee_cup]

Economy tiptoes towards cash to avoid taxation

By Shahbaz RanaPublished: November 3, 2016
50
SHARES
SHARE TWEET

The growing reliance on cash may dent efforts to enhance financial inclusion in Pakistan, which remains one of the lowest in the world, particularly among women. PHOTO: EXPRESS
ISLAMABAD: Pakistan’s economy is making a gradual shift to cash as protection against the government’s taxation policies – a structural change that, according to experts, would lead to low economic productivity and high inflation.

During fiscal year 2015-16, growth in banking sector deposits was far lower than in the previous year while the currency in circulation increased at a much rapid pace, revealed minutes of the last Monetary Policy Committee (MPC) meeting.

Pakistan’s economy is out of danger, says IMF chief

In 2015-16, “the currency in circulation expanded 30.5% as compared to 17.3% a year before, which reflects that private businesses are using cash to settle their transactions,” according to the MPC.

In absolute terms, the currency outside scheduled banks increased from Rs2.555 trillion in 2014-15 to Rs3.334 trillion last year – a net addition of Rs779 billion in a single year.

In the last fiscal year, the federal government imposed a 0.6% withholding tax on all banking transactions worth over Rs50,000 carried out by non-filers of income tax returns in a single day, aimed at increasing revenue collection but without analysing its impacts on the economy. After protests, the government lowered the rate to 0.4%, but people still remain more reliant on cash.

The MPC noted that factors contributing to this trend include “low rate of return on deposits and imposition of withholding tax on banking transactions”.

Pakistan lags behind India, Bangladesh in economic growth: report

The growing reliance on cash may dent global efforts, backed by the United Kingdom, to enhance financial inclusion in Pakistan, which remains one of the lowest in the world particularly among women.

The low return on deposits due to low interest rate environment somehow affected the deposits but the real damage was done by the government’s decision to impose the withholding tax, said Dr Hafiz Pasha, former finance minister. He said that increase in money circulation would lead to high inflation and banks would face problems in lending money to the private sector for expansion.

The currency in circulation-to-deposits ratio, which was 29.3% two years ago, increased to 35.1% last year, according to the International Monetary Fund (IMF) report. This ratio further increased to 37.1% as of September 9, underscoring the economy’s gradual shift towards cash.

The MPC noted that growth in deposits was just 8.7% in the last fiscal year as compared to 12% in fiscal year 2015. However, the deposits of private sector businesses grew by only 1.2% in the last fiscal year, which is considerably low as compared to 9.4% in fiscal year 2015, according to the MPC. The low growth in deposits may also be an indication that households savings are down due to low incomes, said Dr Pasha.

This decline in the deposits of private sector businesses has resulted in the deterioration of the currency in circulation to GDP ratio from 9.3% to 11.3% in just one year.

The withholding tax on cash withdrawals has led to higher-than-usual demand for currency in circulation and lower growth in bank deposits than would otherwise have been the case,” said IMF Resident Representative Tokhir Mirzoev in an emailed response to The Express Tribune.

Asian markets rise again, pounds hits 31-year low

“This highlights the difficulty of widening the tax net in Pakistan. Tax collection, despite witnessing significant improvements over the last three years, is still much below Pakistan’s potential and continued efforts are needed to bring potential taxpayers into the tax net,” he added.

The withholding tax on banking transactions has nullified the efforts towards documentation of the economy, said Dr Ikramul Haq, who is a leading tax expert. He said that people have started avoiding the tax through different means.

While imposing the tax the government had hoped that it would compel the people to file their annual income tax returns. However, the number of filers remained below 1.1 million people, although more than seven million people are paying direct taxes by virtue of over 70 types of withholding taxes.

However, the Federal Board of Revenue earned Rs23 billion by charging 0.4% withholding tax last year – a gain that appears negligible when compared with the adverse implications of cash economy.

“The implementation of the withholding tax, which led to an increase in cash holding, will lead to lower documentation and lower revenues in the longer run,” said M. Ali Kemal, who is an Islamabad-based research economist at Pakistan Institute of Development Economics.

Published in The Express Tribune, November 3rd, 2016
http://tribune.com.pk/story/1218743/avoidance-tactics-economy-tiptoes-towards-cash-avoid-taxation/
Govt answer to it would be increasing indirect taxes again and hurting those in sensitive income groups

Btw many people i know taken their deposits out of banks and are storing them in form of bonds and gold in homes @django @The Sandman @Moonlight @Hell hound @User @Arsalan @WAJsal @Chauvinist

Yaar Zibago, posting stories from Tribune?

Oh kiya ho gya bhai ? Why are giving importance to this shyte paper?

(Writing this without reading the "news", because as a matter of principle I do not read/watch DAWN, GEO and Tribune)

 

[Nilgiri]

When you have amnesty schemes and plea bargaining for the tax evaders, defaulters and corrupt in place ...... then everyone else has the right to evade wherever and however he finds fit.

True. The rot obviously originates somewhat further upstream from this which is just another symptom as we approach the delta of utter collapse of viable basic fiscal structure.

What must Pakistan do to turn the ship around and fight the river current?