The Senate Standing Committee on Finance has approved a proposal to increase the withholding tax on cash withdrawals to one percent for the fiscal year 2025–26. According to reports, the hike will apply only to non-filers.

 

The move was reportedly recommended by Chairman Federal Board of Revenue (FBR) Rashid Mahmood Langrial, who suggested that the withholding tax should be raised from its current rate of 0.6 percent. Reports have outlined how the one percent tax on cash withdrawals by non-filers is higher than the 0.8 percent rate that was initially proposed.

 

In the outgoing fiscal year, cash withdrawals made by non-filers via credit cards exceeding Rs50,000 were also subject to a 0.6 percent withholding tax. The increase in the tax rate is now intended to boost the federal government’s revenues for FY 2025-26.

 

In the weeks leading up to this development, it emerged that the FBR aimed to use the tax hike to “penalise” non-filers. The government also appears to target non-filers on other fronts, with reports suggesting that Islamabad may scrap the non-filer category altogether, curtailing their financial freedoms.

 

Reports suggested that non-filers may not be allowed to make financial transactions of any kind. While the government expects its move to broaden the tax net by penalising non-filers, analysts have outlined how this could lead to the rise of unrecorded transactions.

 

This may cause a significant setback to the federal government, which is implementing reforms to transition the economy towards a cashless system. According to reports, in meetings held prior to the release of the budget, the finance minister pushed for stronger digitisation efforts and a move to limit cash transactions.

 

Reports indicate that withdrawals larger than Rs50,000 will result in tax deduction from the entire amount. Under a one percent withdrawal rate, withdrawals amounting to Rs75,000 in a single day will result in non-filers paying Rs750 to the federal government. Similarly, non-filers withdrawing Rs100,000 in a single day will have to face a tax of Rs1000.

 

While the tax seems nominal at first glance, it could prove to be a respectable source of revenue for the government if non-filers continue to use the formal banking system. However, the government will have to ensure that non-filers do not resort to informal channels for transferring cash.