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ISLAMABAD: Pakistan has taken a significant step by announcing a whopping 400 percent increase in taxes on payments made through debit or credit cards.
The announcement was made by the Federal Board of Revenue (FBR) through the recent Finance Act 2023. The FBR issued a circular detailing the changes to the Income Tax Ordinance of 2001.
The FBR explained that the amendment is targeted at Section 236Y, which was introduced through the Finance Act of 2022. This section subjected payments to non-residents through debit or credit cards to a withholding tax rate of 1 percent for individuals on the Active Taxpayers List (ATL) and 2 percent for non-ATL individuals.
According to the FBR, payments to non-resident entities have been contributing significantly to the outflow of foreign exchange from the country, affecting the overall foreign exchange reserves.
In an effort to discourage unnecessary outflows and conserve foreign exchange reserves, the FBR has now decided to dramatically increase the withholding tax rates under section 236Y.
Under the latest amendments made by the Finance Act of 2023, the withholding tax rate has been raised from 1 percent to 5 percent for individuals on the Active Taxpayers List. For non-ATL individuals, the tax rate has been raised even higher, from 2 percent to 10 percent.
This substantial increase in taxes is expected to encourage people to explore alternative payment methods and reduce their reliance on debit or credit cards for transactions involving non-resident entities.
The government aims to stem the outflow of dollars and stabilize its foreign exchange reserves, thereby strengthening the country’s financial position and economy.
The FBR has also introduced 0.6 percent withholding tax on cash withdrawals over Rs 50,000 by non-filers through credit cards/ATMs in a single day.
The FBR clarified that cash withdrawals made on credit cards or from ATMs shall also be covered by this provision. It further said if the aggregate cash amount withdrawn in a single day exceeds Rs.50,000, the tax is required to be deducted from the entire amount of cash withdrawn.
The withholding tax on cash withdrawal is an adjustable tax against the tax liability of the person for a tax year.
The tax shall not be deducted in case of withdrawals made by the federal government or a provincial government, foreign diplomat or a diplomatic mission in Pakistan, or a person who produces a certificate from the commissioner that his income during the tax year is exempt.
