In a bid to address the outflow of dollars and strengthen its foreign exchange reserves, Pakistan has taken a decisive step by announcing a substantial 400 percent increase in taxes on payments made through debit or credit cards. The move was recently announced by the Federal Board of Revenue (FBR), the country’s national tax revenue agency, as part of the 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 amendment primarily targets Section 236Y, introduced through the Finance Act of 2022, which initially subjected payments to non-residents made 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, such payments have been significantly contributing to the outflow of foreign exchange from the country, impacting the overall foreign exchange reserves.
To curb unnecessary outflows and bolster foreign exchange reserves, the FBR has taken a decisive step to increase the withholding tax rates under section 236Y. As per the latest amendments introduced 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 set even higher, at 10 percent, up from the previous 2 percent.
The significant tax hike aims to incentivize people to explore alternative payment methods and reduce their reliance on debit or credit cards for transactions involving non-resident entities. This measure is expected to help Pakistan stem the outflow of dollars and stabilize its foreign exchange reserves, thus reinforcing the country’s financial position and economy.
The government expresses confidence that this measure will not only address the issue of foreign exchange outflow but also promote the use of official channels for transactions with non-resident entities. By incentivizing the use of more regulated payment methods, the authorities hope to enhance transparency and improve the tracking of financial transactions, ultimately benefiting the overall economy.
However, some concerns have been raised about the potential impact on individuals and businesses, particularly those engaged in cross-border transactions. Critics argue that such a significant tax hike could increase the cost of doing business and may potentially deter foreign investments in the country.
It remains to be seen how the implementation of this tax increase will unfold and its ultimate impact on Pakistan’s economy and foreign exchange reserves. The government will closely monitor the situation and take further measures as needed to achieve a balance between curbing dollar outflows and fostering a favorable investment environment in the country.