The Federal Board of Revenue has gradually shifted responsibility for tax collection to withholding agents due to the weak voluntary tax compliance.
The share of withholding tax in overall income tax collection, for tax year 2105-16, rose to 68pc.
Withholding agents include businesspersons, consultants, exporters, companies, partnerships firms and government departments.
However, the deduction of withholding tax amount by withholding agents is causing problems in various segments of the economy and society.
Indirect withholding tax collection results in an increase in the price of various products and services, while its apparent form aligns it with sales tax.
Policymakers should realise that merely achieving the tax collection target is not desirable if the tools applied for the collection are repressive and hurt business growth
A large segment of retailers, wholesalers, agents and other businesses include the amount of withholding tax they will have to deduct in the retail price and then charge it to consumers. Service providers may also intentionally inflate their bills by including the amount of withholding tax.
Withholding tax distorts efficient market functioning.
A market is said to be efficient if the necessary information is available for making buying and selling decisions with a proper understanding of the prices involved. However, due to the application of withholding tax at the time of payment, buyers and sellers are compelled to revise their mutually agreed price.
Further, the presence of withholding tax in a transaction complicates the pricing of the product. This results in the non-documentation of the economy as businesses increasingly move towards informal ways of conducting transactions.
Then there is the higher cost of compliance with the overall withholding tax regime. The set of procedures required for the deducing, collecting and depositing withholding tax on various transactions requires hiring extra employees and the technological facility for reporting the withholding tax transactions on the FBR E-Portal.
Further, the rules related to withholding tax collection are amended in every tax year which requires training to ensure compliance with the revised procedure. All this involves a significant amount of money.
The indiscriminate application of withholding tax on different sections of society is seriously hurting those people whose annual income does not fall in the taxable bracket and violates the income threshold for various categories of taxpayers.
Another issue is the application of different rates of withholding tax based on the status of a person of being filer or non-filer of their income tax returns. This segregation is aimed at encouraging various classes of taxpayers to file their tax returns voluntarily each year. However, the issuance of an Active Taxpayers List by the FBR is delayed each year and many persons are categorised as non-filers even after filing their tax returns.
Finally the application of withholding tax on due payments creates a negative perception in the general public of the ruling class. This practice creates an impression with regards to the fairness and transparency of the tax policy which directly affects the level of tax compliance.
The FBR needs to address these issues. Policymakers should realise that merely achieving the tax collection target is not desirable if the tools applied for the collection are repressive and hurt business growth.
Published in Dawn, Business & Finance weekly, February 20th, 2017
