The Federal Board of Revenue (FBR) has dramatically increased 400% withholding tax (WHT) on payments made by non-resident individuals via credit or debit cards.
The circular, tagged “number 2 of 2023 for explaining amendments to the Finance Act 2023”, pointed out that section 236Y was instated through the Finance Act 2022. The section subjected payments to non-residents via debit/credit cards to a 1% withholding tax rate for Active Taxpayer List (ATL) individuals and 2% for Non-ATL individuals. The aim is to discourage the outflow of foreign exchange reserves from the country.
The WHT has skyrocketed from 1% to 5% for ATL individuals and 2% to 10% for non-ATL individuals through the Finance Act 2023, followed by the changes of 400% increase in tax rates for Non-Residents.
Impact on Foreign Exchange Outflow
The State Bank of Pakistan (SBP) had previously shared estimates with parliamentarians before the last budget for 2023-24. According to the SBP, roughly $70 to $100 million were spent monthly for payments via credit or debit cards, translating to approximately $1 billion annually.
Under Section 236Y through the Finance Bill, the FBR introduces an advance tax on individuals transferring amounts abroad through credit, debit, or prepaid cards.
All banks are now required to collect advance tax during the transfer of any sum remitted outside Pakistan on behalf of an individual who has completed a credit, debit, or prepaid card transaction with a person outside Pakistan.
The advance tax rate proposed under Section 236Y of the Finance Bill 2022 on the amount remitted abroad through credit, debit, or prepaid cards would be 1% of the gross amount remitted. Notably, the advance tax collected under this section will be adjustable.
 escalates the withholding tax (WHT) on payments to non-residents through credit or debit cards by 400%. This move is designed to curb the outflow of foreign exchange reserves from the country.){kind=link}