KARACHI: The number of tax-filers has gone down to less than 50 per cent of what it was in the fiscal year 2007, reflecting the poor performance of the government and its failure to broaden the tax base.

The State Bank’s first quarterly report of the current fiscal year said that the number of tax-filers saw a steady increase in early 2000s and reached a peak of 1.8 million in fiscal year 2007.

“However, the momentum could not prevail and tax filing declined between the fiscal year 2008 and 2014 to just 0.75 million in fiscal year 2014,” said the report.

“Steps taken by FBR resulted in improvement in tax filing with 0.85 million in fiscal year 2015, and expected to surpass one million in fiscal year 2016,” said the report.

The improvement is still far behind the fiscal year 2007 achievement. Instead of surpassing the 1.8 million figures, the number continued to fall.

The present government is vigorously following the imposition of withholding tax (WHT) on banking transactions to increase the number of tax filers.

The WHT on cash withdrawals from banks was introduced in Finance Act-2005. The tax rate was initially set at 0.1 per cent on cash withdrawals in excess of Rs25,000 per day. The rate was revised upwards to 0.2pc in fiscal year 2007 and 0.3pc in fiscal year 2010.

Meanwhile, the cash limit was enhanced to Rs 50,000 per day in the federal budget of fiscal year 2013.

The State Bank said that the WHT become a highly dependable means of generating revenues.

It said that in the presence of large informal economy and poor culture of voluntary tax payments on the one hand, and structural issues in the tax administration on the other, the WHT is the strong tool to generate revenues.

“As a result of enhanced coverage and differential rates on filers and non-filers, the share of WHT in direct taxes increased to 67.1 per cent in fiscal year 2015, compared with less than 60pc three years back,” said the report.

“The contribution of WHT in total tax collection surpassed 26pc in fiscal year 2015, making it as the most reliable tax resource,” it said.

During the last three years, WHT collection from all sources witnessed a compound annual growth rate of 24.5pc, compared with the growth of 8.9pc in overall FBR taxes, said the SBP report.

The key sources of the withholding tax are contracts and international trade, which together make half of the total collection.

Tax deducted from salaries constitutes 11.5pc of the total WHT. Other important sources are bank interest and securities and cash withdrawal.

The SBP report identified some demerits of WHT as it carries a substantial compliance cost for withholding tax agents. This requires more human resource, IT infrastructure and other overheads to manage the collection mechanism and deposit with the FBR.

“Withholding tax on utilities (telephone bills, electricity bills, education fee, etc) may create an additional burden on tax payers as it involves time lags for refunds,” said the report, adding that its incidence is regressive, like indirect taxes, particularly when applied on transactions.

Published in Dawn, January 20th, 2016