In a move aimed at bolstering its foreign exchange reserves and addressing the outflow of dollars, Pakistan has taken a bold step by announcing a staggering 400 percent increase in taxes on payments made through debit or credit cards.
The announcement was made by the Federal Board of Revenue (FBR), the national tax revenue agency, through the recent Finance Act of 2023. The FBR issued Circular No. 2 of Income Tax dated July 26, 2023, outlining the changes to the Income Tax Ordinance of 2001.
The targeted amendment focuses on Section 236Y, introduced through the Finance Act of 2022, which initially imposed a 1 percent withholding tax rate for individuals on the Active Taxpayers List (ATL) and 2 percent for non-ATL individuals on payments to non-residents through debit or credit cards.
According to the FBR, these payments to non-resident entities have been contributing significantly to the outflow of foreign exchange from the country, impacting overall foreign exchange reserves. To discourage unnecessary outflows and preserve foreign exchange reserves, the FBR has opted to drastically increase the withholding tax rates under section 236Y.
Under the latest amendments introduced by the Finance Act of 2023, the withholding tax rate for individuals on the Active Taxpayers List has been raised from 1 percent to 5 percent. Non-ATL individuals now face an even higher tax rate, with the rate increased from 2 percent to 10 percent.
The government expects this substantial tax hike to motivate individuals and businesses to seek alternative payment methods, reducing reliance on debit or credit cards for transactions involving non-resident entities. By doing so, Pakistan aims to stabilize its foreign exchange reserves, strengthen its financial position, and bolster the overall economy.
Additionally, the government believes that this measure will encourage the use of official channels for transactions with non-resident entities, resulting in increased transparency and better tracking of financial transactions.
Despite the government’s confidence in the effectiveness of this measure, some concerns have been raised about its potential impact on individuals and businesses, particularly those involved in cross-border transactions. Critics argue that such a significant tax increase could raise the cost of doing business and potentially deter foreign investments in the country.
As Pakistan moves forward with this tax policy, it remains to be seen how these changes will impact the country’s foreign exchange reserves and overall economic landscape.