Effects and Influences of the Withholding Tax

As per the Federal Board of Revenue (FBR), the share of withholding tax in direct assessment incomes touched 68% in the primary portion of this monetary year, rising as the main revenue spinner.

Since June 2013, the PML-N government has forced 20 new withholding taxes, while expanding the current withholding tax rates for non-filers in the name of enhancing tax compliance. From that point forward the quantity of withholding tax (WHT) classifications rose from 36 to 56.

According to Mr. Masoud Naqvi, relying on the withholding tax as a source of income is not a good notion. He stated it as not good for the system. Hence, withholding tax should be eradicated once and for all.

The easiest way to gather tax revenues is by collecting WHT through economic agents. Sources show that more than 49% of the tax income is gathered by private organizations that give out cost-free services to their customers. As a result, their share keeps on rising. Even though the time and effort are saved this way, it is not used to keep a check on the non-taxpayers or even remotely monitor them.

Instead the collection of taxes through income-tax demand creation has decreased more and more every year. The chief reason for this ambiguity is because there is no audit authority to keep things in check for the past several years. Moreover, a tremendous amount of tax is stuck in prosecution.

Official figures demonstrate that withholding tax collection touched Rs. 405 billion in July-December 2016 as against Rs. 372 billion collected over the comparing time frame a year ago, mirroring an expansion of 8.87%. The tax collection has expanded to Rs. 600.10 billion in the first 6 months of the year as against Rs. 546.32 billion over the comparing time frame a year ago, an upsurge of 9.84%.

As a payment with returns and advances, the remaining amount of Rs. 195 billion was received. By 31st December, 2016, Rs. 22 billion were returned. The remaining amount of tax was collected as advance tax from taxpayers.

Contribution of Different Factors in Withholding Tax

According to the research done by the FBR, it was revealed that 90% of revenue from withholding tax was being generated through 9 different categories. These categories are salaries, telephone, cash withdrawals, electricity bills, dividends, imports, contracts and interest on bank deposits.

The greatest income was produced from merchandise and enterprises, which remained at Rs. 97 billion in the large portion of this financial year, trailed by Rs. 91 billion from imports, Rs. 45 billion from salaries, Rs. 24 billion from profit wage, and Rs. 25 billion from telephone customers.

Most of the WHT revenue was generated through regional tax offices (RTOs) in the four main cities of Pakistan i.e. Karachi, Lahore, Islamabad, and Rawalpindi. A meager amount was collected by the remaining 11 RTOs.

Introduction of the Withholding Tax

Withholding taxes were launched in order to identify non-taxpayers and bring them into the tax net in the late 1990s. Former Tax Reforms Commission Chairman Masoud Naqvi said that the misuse of tax has increased over time. Additionally, WHT is not being used for the purpose it was created i.e. identifying non-taxpayers and tax evaders.

The withholding charge on money withdrawals from banks was intended to distinguish individuals who managed in substantial money exchanges yet their names were not on the tax roll. This has yielded Rs. 14 billion in the primary portion of the current financial year. He stated:

“We have recommended that this overwhelming dependence on withholding charges — particularly those that are hypothetical in nature — be eliminated bit by bit”

He further added that including it won’t be possible to get rid of it in one go. Moreover, he said the dependence on withholding charge as an income spinner is bad for the system.

Role of Consumption

As stated by the analysts, development in Pakistan is fundamentally determined by rising consumption and contributes 89% of GDP. It is developing at around 5% every year. In this way, consumption helps to give an opportunity to income-oriented policymakers to augment indirect tax collection.

A few reviews additionally call attention to the steadily extending withholding tax administration that it is overburdening the corporate segment. It needs to employ additional staff to conform to the complex work of regulations and laws. In addition, organizations regard withholding charges as an expense and pass this weight on to their buyers, making the WHT an indirect tax.

A portion of the withholding taxes on the buyer’s end has no mechanism to refund the taxes. For instance, the FBR charges more than 15% withholding tax on mobile network cards. A person from a lower salary grade pays Rs. 15 as withholding tax on a card of Rs. 100, while this, in no way, shape or form, falls in the classification of a taxable income. There is a considerable list of such cases.

The plan of differential tax assessment for filers and non-filers has been extended to shore up revenues. Until 31st December 2016, number of people who filed their tax returns was just 847,000, which was more than 1 million in 2015.

Another problem is that some withholding agents are not depositing the amount of tax they collect from their subscribers in the name of withholding tax.

Source: Dawn / image: canstockphoto

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