KARACHI: Has the withholding tax on banking transactions encouraged ordinary people to reduce the use of banking channels in everyday life?

The truth seems to have lost in the cacophony of the marketplace: traders insist the withholding tax is pushing people away from banks while most independent economists say the hype around the issue is artificial and will be short-lived.

With the imposition of 0.3% withholding tax on banking transactions worth more than Rs50,000 in a single day by non-filers, traders warned of a steep decline in banking transactions, decreased deposits and an overall reduction in the use of formal payment instruments July onwards.

To support their argument, traders point to data from July that shows private businesses’ deposits decreased by 5.25%, or Rs131.8 billion, in just one month. However, economists are quick to highlight that the sharp decline in July was perfectly in line with the last five-year trend, which shows deposits always post a month-on-month decrease in the first month of every fiscal year.

So what exactly is the impact of the withholding tax on banking transactions of more than Rs50,000? Has the public reduced its use of cheques and pay orders after July 1 to avoid the additional costs?

Perhaps the answer to this question lies buried in a 260-page document titled ‘The Statistical Bulletin’ that the State Bank of Pakistan (SBP) released on Thursday.

In a section called Clearing House Statistics, the SBP gives a breakdown of the amount of money – and the number of cheques – that 16 of its country-wide clearing houses process every month.

Clearing houses tally up all cheques and bills received from banks every day and come up with net balances that need to be paid in cash. In other words, SBP’s clearing data incorporates every single cheque written and deposited into the banking system across Pakistan.

According to the latest Statistical Bulletin, there was a substantial decline in the number of cheques presented for clearing in July – the month when the withholding tax on banking transactions became effective.

The total number of cheques cleared by the SBP’s clearing houses was 4.5 million in July, down 28.7% from 6.3 million cheques cleared in the preceding month. As for the amount of money processed via those cheques, the month-on-month decline clocked up at 30.8% in July.

There is an argument against the month-on-month comparison of clearing data though. For example, Ramazan began on June 18 and ended with Eid on July 17. With fewer office hours during the holy month, banks had obviously less time each day to process cheques received from commercial banks.

But a look at the year-on-year data also paints a largely similar picture about cheques processing in July. From 5.2 million cheques in July 2014, the number of the payment instruments cleared in the first month of the current fiscal year dropped 14% year-on-year. The decline in the amount of money passing through clearing houses in July remained 11% year-on-year, SBP data shows.

Speaking to The Banker Pakistan, BMA Capital Director Research and Business Development Azfer Naseem said the year-on-year decline in the number of payment instruments cleared during July is a direct consequence of the withholding tax on banking transactions.

According to Karachi Chamber of Commerce and Industry (KCCI) President Iftikhar Ahmed Vohra, a large number of people making money off the undocumented economy – estimated to be equal to the size of the documented economy – converted their wealth into dollars before July and minimised the use of formal payment instruments.

“The use of informal payment mechanisms, like the parchi system, along with prize bonds, foreign currency and hard cash for business transactions in the undocumented sector has gained momentum.”

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