Karachi, July 29, 2023 – In a bid to curb the outflow of dollars and bolster its foreign exchange reserves, Pakistan has taken a significant step by announcing a whopping 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, detailing the changes to the Income Tax Ordinance of 2001.
The FBR explained that the amendment is targeted at Section 236Y, which was introduced through the Finance Act of 2022. Initially, this section subjected payments to non-residents through debit or credit cards to a withholding tax rate of 1 percent for individuals on the Active Taxpayers List (ATL) and 2 percent for non-ATL individuals.
According to the FBR, payments to non-resident entities have been contributing significantly to the outflow of foreign exchange from the country, affecting the overall foreign exchange reserves. In an effort to discourage unnecessary outflows and conserve foreign exchange reserves, the FBR has now decided to dramatically increase the withholding tax rates under section 236Y.
Under the latest amendments made by the Finance Act of 2023, the withholding tax rate has been raised from 1 percent to 5 percent for individuals on the Active Taxpayers List. For non-ATL individuals, the tax rate has been raised even higher, from 2 percent to 10 percent.
This substantial increase in taxes is expected to encourage people to explore alternative payment methods and reduce their reliance on debit or credit cards for transactions involving non-resident entities. By doing so, Pakistan aims to stem the outflow of dollars and stabilize its foreign exchange reserves, thereby strengthening the country’s financial position and economy.
The government has expressed confidence that this measure will not only help to address the issue of foreign exchange outflow but also promote the use of official channels for transactions with non-resident entities. It is hoped that by incentivizing the use of more regulated payment methods, the economy will see increased transparency and better tracking of financial transactions.
However, some concerns have been raised about the potential impact on individuals and businesses, especially those engaged in cross-border transactions. Critics argue that such a significant tax hike could increase the cost of doing business and may deter foreign investments in the country.
As this new tax regime takes effect, the government will closely monitor its impact on the economy and make necessary adjustments if required to strike a balance between curbing foreign exchange outflow and maintaining a business-friendly environment.