Why the Government should rethink the Proposed Taxation of Bank Cash Withdraws

By CPA Kalinda Gonzaga Joseph

Practitioner, Kalinda & Associates

The Government of Uganda through the Ministry of Finance, Planning and Economic Development on February 9, 2021 through a Budget Consultation letter ref TPD 95/167/01 Vol.3 written by Patrick Ocailap to the Governor Bank of Uganda shows that it was proposed in their consultative meetings that they explore taxation of cash withdraws from commercial banks at 0.5% on counter, agency banking and ATM withdraws just as it is with Mobile Money withdraws. The aim is to encourage cash-less transactions, promote e-commerce as well as raise additional revenue.

This proposal has been received with mixed reactions from all corners but majorly with all populations against the proposed move.

Background:

Financial Inclusion (FI), which refers to access and usage of appropriate financial services, continues to play an integral role in the realization of inclusive and sustainable growth. It is vital for the economic and social development of a country.

According to the National Financial Inclusion Strategy 2017-2022, Financial Inclusion has been defined as having access to and using a broad range of quality and affordable financial services which help ensure a person’s financial security.

Financial Inclusion is based on four pillars:

• Financial Literacy
• Financial Consumer Protection
• Financial Innovations
• Financial Services Data and Measurement

According to the 2018 Financial Sector Deepening Uganda report on Banking the number of Ugandans without bank accounts or some form of structured and legal financial services currently stands at 89% or 16.5 million of the 18.6 million adult population of Uganda, an indication that there is need to continuously develop banking services that meet customer’s needs across all age groups. This implies that only 11% of the adult population in Uganda has accounts or use legal financial services.

It also shows that 41% of the surveyed population used and had ATMS, 81% used banks for savings and only 5% used agency banking.

World Outlook:

Taxing bank cash withdraws is not a new phenomenon. It has been done in countries such as Greece, Pakistan and India.

In Greece, the cash point was introduced in 2015 to deter people from panicky withdraw of cash from the banks which even led to bankruptcy in 2009. Greece levied

£1 for every £1,000 transaction to deter citizens from clearing out their bank accounts.

In Pakistan, section 231A of the Income Tax Ordinance required paying 0.3% for filers and 0.6% for non-filers per aggregate cash withdraws from all bank accounts in a single day being above Rupees 50,000.

In India, Banking Transaction Tax was imposed in a bill passed in 2009 tax on cash withdraws from current accounts of more than Rupees 50,000 to detect unaccounted for money. Section 194N of the ITA came into force effective 01/07/2020 requiring any specific payer (bank, cooperative or post office) to Deduct Tax at Source if a person withdraws in cash more than 1 crore. The move was aimed at increasing accounted for transactions in the economy, reduce cash transactions as well as shifting India to the digital economy.

Implications of the proposal:

With the low statistics on the banked adult population, currently standing at less than 3 million people, the proposal is likely to impede financial deepening and its entire objectives as people will decide to keep money at home in bags, pots, below the beds and the like.

The move will reduce money in circulation, reduce demand and as a result impact performance of businesses. This in turn will reduce profits and as such taxes to be collected.

Taxing cash withdraws amounts to double taxation. The money deposited in banks is through salaries or business proceeds. Like the research shows, 81% of the population uses banks for savings after paying taxes such as Pay as You Earn and Income Tax.

Taxation of cash withdraws is against the taxation principles of equity and fairness. Tax should only be collected when someone earns. Withdraw of cash from a bank is a residual process after earning has occurred and has already been subjected to appropriate taxation.

This targeted taxation is to a group that is already in the tax bracket, more certainly. It will therefore not capture the targeted informal sector. Taxing the same group of people demoralizes and also reduces disposable income as well as new investments.

The move will erode profits for forex bureaus, SACCOs and money remitters who frequently need to withdraw money to serve their clients. Many of the people being served by this financial services sector do not have bank accounts but again need their services.

Conclusion:

Government should devise means of widening the tax bracket by bringing on board especially farmers and small real estate dealers just like they did with the fishermen. The proposal should be dropped.

Kalinda Gonzaga Joseph is also a Certified Tax Advisor