THE share of withholding taxes in direct tax revenue surged to 73pc in the first 10 months of the current fiscal year from earlier 65pc, emerging as the leading revenue spinner in this segment for the Federal Board of Revenue.

The increasing reliance on withholding taxes is mainly driven by the rising number of withholding tax (WHT) categories — 55 now against 36 in 2012-13 — and their increasing rates.

In the budget 2016-17, four new withholding taxes were imposed while increasing the existing withholding tax rates for non-filers, an instrument to pocket extra money on the pretext of improving tax compliance.

Former Governor State Bank of Pakistan Salim Raza says growth has been fuelled by rising consumption over the past five years. This consumption, he said, has now reached 89pc of GDP and growing at around 5pc annually against a GDP growth of under 4pc per year. So this consumption provides revenue-oriented policymakers an opportunity to increase tax collection in an indirect style.

The consumption driven growth is weighed down by indirect taxes, increasing manifold in the last few years, at a time when the potential for investment-led or export-led economic growth is minimal. The customs collection grew over 32pc, sales tax on imports by 22pc and withholding tax over 20pc during the 10 months of this fiscal year from a year ago.

Mr. Raza says the indirect taxes are effectively 85pc of the FBR’s tax take if the non-income based aspects of direct taxes, such as withholding taxes, are taken into account. Besides the regressive iniquity of such a regime, more indirect taxes in a slow-growth economy suppress demand, hurting production prospects, he elaborated.

The Finance Bill 2016 takes two major decisions in the WHT regime. Some new measures were introduced for non-filers — 5pc tax on the value of minerals, 3pc tax on the value of vehicles at the time of leasing, advance tax of 4pc on general insurance premium and 1pc on life insurance.

A tax official says some of the withholding taxes are ‘extortion’ from people as there is no refund mechanism

The scheme of differential taxation for filers and non-filers has been expanded to penalise non-compliant people. As a result, the various rates of withholding taxes for non-filers were also increased on dividend income, payment for goods by fast-moving consumer goods, brokerage and commission, collection of tax by stock exchange, prize bonds, electricity of commercial users, transfer or attesting transfer of immovable property, and purchase of immovable property.

Similarly, the government has introduced a 3pc advance tax on the turnover for those businesses which file sales tax returns with the provincial revenue authorities. This tax will be collected by the provincial revenue boards. There are 15,000 sales tax return filers with the provincial revenue authorities who are not filing income tax returns.

Withholding taxes were introduced in the 1990s to identify tax evaders. And the PML-N government alone has introduced around 20 new withholding taxes in the last four budgets.

Official statistics show that over 90pc of the revenue from withholding taxes is being generated from nine categories. These include imports, salaries, telephone, cash withdrawals, dividends, electricity bills, contracts and interest on bank deposits.

A tax official said some of the withholding taxes are ‘extortion’ from people as there is no refund mechanism. For example, the FBR charges over 15pc withholding tax on mobile cards. A person from the lower income category pays Rs15 as withholding tax on a Rs100 card, while this, by no means, falls in the category of a taxable income. There is a long list of such cases.

At the same time, regional tax offices (RTOs) and large taxpayer units in four cities generate the bulk of the WHT revenue — Karachi, Lahore, Islamabad and Rawalpindi. A negligible amount is collected at the remaining 11 RTOs across the country.

The tax authorities find the collection of WHTs through economic agents as the easiest mode to gather tax revenues, virtually compensating for their failure to expand the income-tax net. Some studies have also pointed out that the ever-expanding withholding tax regime is overburdening the corporate sector, which has to hire extra staff in order to comply with the complex mesh of regulations and tax laws.

Tax Reforms Commission (TRC) had proposed a 1pc compensation for the withholding agents, but this proposal was also dropped.

And due to a lack of adequate tax education, small taxpayers find it difficult to meet their obligations. Many businesses treat withholding taxes as expense and pass this burden to their consumers, making the WHT into an indirect tax.

Tax officials privately admit that this heavy reliance on WHT can be gradually reduced through administrative tax reforms.

The reforms initiated in the year 2000 have badly affected the concept of horizontal taxation. The TRC suggested that the government decentralise the tax system to mofassil areas from the current regional tax offices to enhance direct tax collection on actual income.

As long as the tax machinery is not reformed, the government will keep on taking an easier course or temporary measures to generate revenue.

Published in Dawn, Business & Finance weekly, June 13th, 2016