KARACHI: The dollar price may cross Rs200 with the sudden imposition of a withholding tax on exchange companies, which are getting notices to the tune of hundreds of millions of rupees from the Federal Board of Revenue (FBR).

Representatives of the exchange companies told Dawn on Wednesday they are getting notices from the FBR on non-payment of the withholding tax that was withdrawn in 2016.

Tax notices have created panic among the exchange companies while their representatives insist the added cost will be passed on to customers, which may push the dollar rate beyond Rs200.

“The exchange companies are getting notices to pay up to Rs1 billion in withholding tax. It was implemented in 2014 and withdrawn in 2016,” said Malik Bostan, chairman of the Exchange Companies Association of Pakistan.

He said the companies will pass on the 16pc withholding tax to customers who will have to bear the added cost of up to Rs20 per dollar. This will result in the exchange rate of Rs200 or higher.

“It looks like a conspiracy against the government. There is lot of pressure on the exchange rate. The government is already facing criticism due to the devaluation,” he said.

Exchange companies say they will pass on the tax impact to customers

The black market will replace the legal business of the exchange companies if the dollar reaches Rs200, he said.

“The grey market has already taken a big chunk of our business. It offers a higher price. Dollars are being sold at higher rates to smugglers, hawala people and Afghans,” said Zafar Paracha, who runs one of the country’s largest exchange companies and also serves as general secretary of the same association.

An ‘A’ category exchange company that did not want to disclose its identity shared its FBR notice with Dawn. It showed the amount of over Rs1bn in withholding tax. The exchange company said it will pass this on to the currency market and the dollar rate will skyrocket. The dollar closed at Rs178.30 on Wednesday.

Mr Bostan said imposing the withholding tax makes no sense as the market is already volatile and the government is under pressure. “In a meeting with the FBR chairman, we informed him about the consequences of the 16pc withholding tax,” he said.

He noted that the FBR chairman assured the exchange companies that the notices would be withdrawn and that the companies would not face any harassment at the hands of the taxmen.

In the recent past, the exchange companies faced a number of restrictions with regard to their sales, although their businesses are fully documented, he said.

The government along with the State Bank of Pakistan took these measures to regulate this business in view of the Financial Action Task Force. Pakistan is in compliance with most of the FATF requirements, although it is still on the grey list of the watchdog that compels the authorities concerned to keep this business under tight control.

At the same time, the government also wants to get control of the outflow of dollars from the country.

Published in Dawn, January 20th, 2022