Pakistan is caught up in a debt trap, and debt management is a big issue for the PTI government which is taking new loans to pay off old ones. Among others, National Savings Schemes (NSS) are a convenient mode of non-bank borrowing for the government. The schemes pay savers a substantially higher return than they earn on saving products of banks. Banks do not like this and use their clout in the financial sector to block any move that makes the schemes more lucrative than they presently are.
Lately, investments in NSS have been falling after the discontinuation of high-denomination prize bonds of Rs40,000, Rs25,000 and Rs15,000. Total investments in NSS fell in the first 11 months of the last fiscal year: investors made net withdrawals of about Rs193.5 billion.
A decline in non-bank borrowing via NSS amidst a high fiscal deficit makes the government more dependent on bank borrowing. Government borrowing adversely affects economic activities of the private sector, undermining the economy’s growth potential.
A decline in NSS investments is a matter of concern for the country’s economic managers. That is why the government occasionally announces an increase in the rates of return on NSS. But borrowing by the government from banks keeps growing. Banks have long been enjoying the benefits of this cyclical issue of domestic debt management, while the people suffer when the profit on the saving instruments of NSS is reduced.
Questions have been asked about a recent increase in tax on the investment income from NSS. The government justifies the move with a view to containing the high fiscal deficit. It needs to be mentioned here that a large sum of money that is deposited in NSS is the taxed income of people. In recent years, however, the government has started taxing at a higher rate the untaxed money (i.e. the money invested in NSS by people who do not regularly file their income tax returns). In the new fiscal year, the tax rate on the NSS income is 15pc for regular tax return filers and 30pc for the non-filers, up from 10pc and 20pc, respectively, until last year.
This big jump in the withholding tax on NSS returns will discourage people, particularly small investors, from parking funds in NSS. There are two key reasons for it. First, the majority of individuals who invest in NSS are not on the active taxpayers’ list and, hence, liable to pay 30pc withholding tax, which is too high. And second, the rates of 15pc for tax return filers and 30pc for non-filers are applicable only if their profits from investment in NSS remain up to half a million rupees. If the profit exceeds the limit, both will have to pay 35pc withholding tax.
Needless to say, this will encourage non-filers to invest large sums of money into NSS so that they can earn returns of more than half a million rupees and are treated on a par with the filers. The stock of investment in national savings exceeds Rs4.3 trillion. It is not known how much of it has been invested by small investors. But as far as the number of investors is concerned, more than 60pc of them are thought to be small investors.
According to available figures, in the first 11 months of 2020-21, net investments in NSS turned negative due to the encashment of unregistered prize bonds but investments in other NSS products also remained negative in totality. The only product that attracted net investments of about Rs23.6b was regular income certificates.
Increasing the tax rate on the NSS income for non-filing small investors is part of the drive for the documentation of the economy. But the government committed a mistake here: it could have increased the rate gradually. It is also not clear whether senior citizens and widows enjoy any sort of exemption from the high rate of tax on the NSS income. All in all, the new higher rates of tax will have an adverse effect on the culture of savings in the country. The authorities need to revisit their decision.