ISLAMABAD: In order to widen a highly constrained tax base, the government’s tax commission has advocated the reintroduction of withholding tax on cash withdrawals and banking transactions as well as the eradication of hard currency from the market.

According to official sources, the Federal Board of Revenue (FBR) was seriously contemplating suggesting that a 0.6% tax be reinstated on cash withdrawals, financial instruments, and banking transactions beginning in July of this year.

But it appears that both of the ideas made by the Reform and Revenue Mobilisation Commission (RRMC), which is chaired by Ashfaq Tola, contradict each other.

Since people have historically been effective at keeping cash out of the banking system, the levy on cash withdrawals by non-filers of tax returns may foster the growth of the informal sector.

The RRMC suggested that the government look at ways to lessen cash use and, at the very least, get rid of all the hard currency in circulation. The plan is to stop foreign exchange businesses from dealing in dollars and transfer that business to commercial banks, who will record those transactions.

According to a study created by the RRMC, all transactions in foreign currency should be handled through the banking system, with the exception of providing outgoing travellers cash in dollars at airport counters, which can be handled at airport counters.

The management of Pakistan’s tax system is still unsteady and inadequate. Only 3.6 million of the 7.6 million persons enrolled with the FBR file tax returns, which speaks volumes about how ineffective the tax system is.

While foreign exchange firms help move money in and out of the nation, some of them have been implicated in money laundering in the past.

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According to sources, the government’s hands “have been strengthened by the RRMC report” and the implementation of withholding tax on banking transactions and cash withdrawals was on the table for the upcoming budget.

In the past, several withholding tax regulations have been repealed, most notably the withholding tax on cash withdrawals, banking instruments, and non-cash banking transactions. As a result, the study claims that withholding tax’s contribution to direct taxes decreased.