If your bank has been deducting seemingly random amounts of money from your account since last week, you might want to consider filing your income tax return.

As of July 1, the Finance Act, 2015 went into effect, and a new measure in it started to be silently implemented by the banks. Today they are creating a large stir around the country.

Those provisions require banks to deduct 0.6pc from all outgoing transfers from any bank account whose owner did not file a tax return last year. Since banks have access to the FBR database, they can easily determine who amongst their depositors filed a tax return and who did not. However, some reports suggest that a few banks may still be struggling with making this determination.

Specifically, the new provisions state that “[e]very banking company shall collect advance adjustable tax from a non-filer at the time of sale of any instrument” such as cheques and pay orders, as well as “transfer of any sum” via any channel, whether paper or electronic, “where the sum total of payments for all transactions … exceed fifty thousand rupees in a day”.

For a non-filer of an income tax return, this means if the sum total of your transactions from your bank account exceeds Rs50,000 then 0.6pc of the total amount will be automatically deducted as a withholding tax and transferred to the government at the end of the day. Those who have filed their returns should be seeing no deductions.

So if you are a non-filer then you have a decision to make. You could hurry up and file your return, which can be filed at any time. Or you could open multiple bank accounts and keep the sum total of your transactions from each below Rs50,000 per day. Or you could just go ahead and pay the 0.6pc withholding tax and consider that the fee for the luxury of remaining a non-filer.

The government has budgeted Rs30bn in revenue through this measure, says a high-level source in the finance ministry, but adds that the real intention of the measure is to encourage documentation.

“We can see many people who are non-filers, yet they’re spending large amounts of money on a lavish lifestyle,” says Shahid Hussain Asad, spokesman for FBR who is also Member Income Tax policy and has been involved in dealing with the banks to operationalise the deductions.

“How else do you go after these people?”

Once the non-filer decides to file a return, all the deductions already applied can be adjusted against their tax liabilities.

But the business community, which is the most heavily impacted group under the measure because of the sheer volume of their daily transactions, is up in arms against the measure. Leading the charge are traders and retailers. On Saturday, a series of scattered and localised strikes were observed against the measure by some trade associations in various cities, and by Monday the opposition had grown into a full-fledged movement.

The Chambers of Commerce of Karachi, Lahore, Multan and Faisalabad spoke out strongly against the measure and trade associations in all three cities observed full day strikes, demanding the government withdraw the measure.

The finance minister has agreed to meet representatives of some of the trade associations and chambers on Wednesday.

The business community is feeling the impact across the board. “Already we are hearing complaints from people who have seen deductions from the accounts once they placed some money with us,” says Farid Khan, head of ABL Asset Management, some of whose clients are seeing deductions every time they transact on their investment.

Likewise, industrialists who are filers are also impacted. “More than 50pc of our work is with non-filers,” says Zubair Motiwala, a business leader based in Karachi, “and they’re demanding this 0.6pc from us.” The size of the informal economy in Pakistan is so large, he adds, that they can dictate terms to their formal sector counterparts, ultimately causing the costs of such documentation measures to fall on formal sector players instead.

It is not unusual for companies that are registered and possess National Tax Numbers to fail to file their return. A recent report by the Sustainable Development Policy Institute (SDPI) showed that only 21pc of registered companies in Pakistan paid any income tax in the fiscal year ended June 2013. Their total tax contribution was Rs315bn which is a very large amount considering only a fifth of registered companies contributed to it.

If that proportion can be raised from a fifth to a half, the revenue yield for the government would be phenomenal.

But how do you encourage companies to file their returns, and then to agree to pay any income tax? That is the question that has bedevilled many governments for years now, and all attempts to penalise non-filing have landed up in the midst of an outcry similar to the one taking shape now.

“This is going to be withdrawn,” says Motiwala. “I have seen how the government operates from inside and out for decades now, they are very scared of strikes and outcries of this sort. I’m telling you that this will be withdrawn”.

The first clue to whether or not that will happen will emerge from the meeting today.

Published in Dawn, July 8th, 2015

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