The Pakistani government has announced a significant tax relief measure, granting withholding tax exemption on the transfer of foreign remittances to Pak Rupee (PKR) accounts. However, tax experts have raised concerns about the practical implementation of this exemption, particularly regarding the bifurcation of transactions for banks.
The Overseas Investors Chamber of Commerce and Industry (OICCI) highlighted that currently, withholding tax applies to certain banking transactions executed by individuals not listed on the Active Taxpayers List. The Finance Bill proposes to exempt these transactions from withholding tax for the entire tax year, provided the funds credited to the PKR account are foreign remittances.
The OICCI pointed out a significant practical challenge for financial institutions: differentiating between foreign remittances and local deposits in customer accounts. “A customer can deposit funds in their PKR accounts through cash or clearing cheques also, and it’s impractical for a financial institution to bifurcate the subsequent debit transactions executed by the customer between foreign remittance and local deposits,” the OICCI stated.
The complexity arises because customers frequently use their PKR accounts for both foreign remittance deposits and local transactions. The proposed exemption does not account for this mix of transactions, making it challenging for banks to accurately apply the withholding tax exemption solely to foreign remittances.
To address this issue, the OICCI recommends either omitting the proposed clause (101AA) before the Finance Act 2020 is passed or amending it to specify that the exemption applies only to PKR accounts with no domestic credit transactions executed by the taxpayer. This would simplify the process for banks and ensure that the exemption is applied accurately and fairly.
Tax experts concur with the OICCI’s concerns, emphasizing the need for clear guidelines and feasible implementation strategies. Without such measures, the exemption could lead to confusion and potential errors in tax application, undermining the policy’s intended benefits.
The government’s initiative aims to encourage foreign remittances by offering tax incentives, recognizing their critical role in the national economy. Remittances contribute significantly to Pakistan’s foreign exchange reserves and support many households across the country. However, for this policy to be effective, it must be practical and manageable for financial institutions responsible for its implementation.
As the Finance Bill moves through legislative processes, stakeholders hope for a resolution that balances the government’s objectives with practical execution, ensuring that the tax exemption achieves its goal of promoting foreign remittances without imposing undue burdens on financial institutions.
