Karachi, August 28, 2024 – The banking sector in Pakistan has experienced a seismic shift as account holders withdrew a colossal Rs 518 billion in response to recent tax amendments effective from July 1, 2024.
This exodus has sent ripples through the financial markets, reflecting a growing apprehension among depositors about the changing fiscal landscape.
According to the latest figures from the State Bank of Pakistan (SBP), the total deposits in the banking system plummeted to Rs 30.603 trillion by the end of July 2024, down from a record high of Rs 31.121 trillion in June 2023. This marked decline is being attributed to a slew of tax reforms introduced in the 2024-25 budget, which have altered the economic calculus for many depositors.
Financial analysts are pointing to the tax modifications as a primary catalyst for the withdrawal frenzy. Historically, July has often seen fluctuations in deposit levels, but the scale of the current outflow has been unprecedented. “The magnitude of withdrawals reflects a clear shift in depositor behavior in light of the new tax measures,” remarked a senior market analyst.
Tax experts have expressed concerns that the new policies may inadvertently fuel a burgeoning cash economy. The increased taxes on salary income and heightened withholding taxes on specific transactions have already begun to alter financial behaviors. “We’re seeing a significant uptick in cash transactions as individuals and businesses alike seek to circumvent these elevated taxes,” noted Zeeshan Merchant, former president of the Karachi Tax Bar Association (KTBA).
Merchant further explained that the steep rise in salary taxes has driven employees to request their wages in installments, aiming to mitigate their tax liabilities. Meanwhile, the spike in withholding taxes is prompting traders to favor cash dealings over bank transactions, a strategy designed to avoid higher tax burdens and evade documentation.
This shift towards a cash-based economy presents a substantial challenge for the government, which has been striving to enhance financial transparency and broaden the tax net. Merchant advocated for a strategic overhaul, emphasizing the need to lower direct tax rates to incentivize compliance and foster a more cashless economy. “Reducing tax rates could encourage a broader swath of the population to engage with the formal banking sector, which would ultimately help achieve the government’s goals of financial inclusion and economic stability,” he argued.
The significant withdrawal of deposits has underscored the delicate balance between taxation and economic activity. As policymakers grapple with the implications of these changes, there is a growing call for a more nuanced approach to tax reform—one that balances revenue generation with the need to sustain economic confidence and ensure the smooth functioning of the financial system.
In the wake of these developments, the banking sector faces a critical period of adjustment. How the government responds to these challenges will likely shape the future trajectory of Pakistan’s economy and its efforts to transition towards a more transparent and digitized financial environment.
