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The Federal Board of Revenue (FBR) has introduced revised withholding tax rates targeting individuals earning from prize bond winnings and profits on debt or loan interest under the National Savings Schemes. The new policy, aimed at encouraging tax compliance, imposes significantly higher rates on those not registered on the Active Taxpayers List (ATL).
Filers vs. Non-Filers: Sharp Tax Rate Disparity
According to the new rules:
- Filers (ATL members) will be subject to a 15% withholding tax on both prize bond winnings and profit from debt.
- Non-filers will face a 30% withholding tax, double the rate applied to compliant taxpayers.
This stark difference is part of the government’s broader strategy to incentivize tax registration and expand the formal economy.
Section 151: Tax on Profit from Debt
The same two-tier tax structure applies under Section 151 of the Income Tax Ordinance, which governs profits earned on savings and loans (profit on debt):
- Filers: 15% withholding tax
- Non-filers: 30% withholding tax
This affects not only prize bonds but also fixed deposits, term accounts, savings accounts, and other instruments that generate passive income from financial institutions or government-backed schemes.
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Higher Tax Slabs for Profit on Debt Over Rs. 5 Million
In cases where profit on debt exceeds Rs. 5 million within a tax year, the income will be taxed under normal income slab rates rather than fixed withholding:
- If annual profit exceeds Rs. 5.6 million, the taxpayer will be charged at a 45% tax rate.
- If annual profit is between Rs. 5 million and Rs. 5.6 million, a 40% tax rate applies.
This move is designed to ensure high-income earners are taxed progressively, in line with business income rates, rather than benefiting from flat rates applicable to smaller savings.
Impact on National Savings and Investment Behavior
The new tax regime is expected to have a significant impact on investment behavior, especially for individuals relying on government savings schemes or those purchasing large volumes of prize bonds.
While the move may encourage more individuals to register as taxpayers, critics argue it could also discourage small savers and retirees who depend on passive income, especially those unaware of the benefits of being ATL-registered.
Government’s Push for Tax Compliance
The FBR’s tax reform is part of a wider compliance drive following recommendations from budgetary frameworks and international lenders. By penalizing non-filers and rewarding compliant taxpayers with reduced rates, the government aims to widen the tax net and increase revenue collection without overburdening salaried or low-income individuals.
