Withholding Tax and Financial Inclusion: A Time-Series Analysis of Pakistan's Fiscal Policy
DOI:
https://doi.org/10.5281/zenodo.13683111Keywords:
Withholding Tax, Financial Inclusion, Fiscal Policy, Private Deposit Ratio, Currency in CirculationAbstract
Purpose: This study examines the impact of withholding tax on banking transactions and its effect on financial inclusion in Pakistan—where the hidden economy is large.
Design/Methodology/Approach: The study utilizes monthly time-series data from January 2005 to June 2022 and employs the Autoregressive Integrated Moving Average (ARIMA) intervention model to analyze the effects of six withholding tax interventions on financial inclusion.
Findings: The results indicate that withholding tax interventions generally reduced financial inclusion in Pakistan. Specifically, withholding tax increases in 2008 and 2015 reduced the private sector deposit ratio and increased currency in circulation, while a tax reduction in 2012 temporarily improved financial inclusion. However, subsequent reductions in 2018 and 2021 again led to a decline in financial inclusion, suggesting that such interventions either had a negative impact or were irrelevant to financial inclusion.
Implications/Originality/Value: The findings of this study highlight the ineffectiveness of withholding tax on banking transactions as a tool for enhancing financial inclusion—with implications for fiscal policy in Pakistan and other emerging economies such as Argentina and India. The study suggests that the finance divisions of these countries should reconsider the implementation of banking transaction taxes, as they may hinder progress toward sustainable development goals.
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