ISLAMABAD: Fuelled by rising salaries, the withholding tax has contributed the highest growth to the country’s ‘direct taxes’ during fiscal year 2016-17, showing continuously rising reliance on regressive taxation.

“Withholding tax (WHT) contributed a major chunk of around 67 per cent in gross direct tax during 2016-17… its collection was Rs944 billion against Rs831bn (of previous year), indicating a growth of around 13.6pc,” the Ministry of Finance reported to the parliament, adding that a noticeable growth of 21pc was witnessed in salary.

This meant the WHT had a 67pc share in gross direct tax collection of Rs1.4 trillion followed by Rs370bn of voluntary payments.

Struggling to expand the overall tax net, the government has been broadening the WHT scope by charging higher tax rates to non-filers of income tax returns, resulting in better recoveries from a narrow base. The government has been saying that the greater reliance on WHT was more of a tool to document the economy than revenue generation so that it could ultimately reduce tax rates.

But critics say it was a regressive tax policy that hampered growth instead of extending tax net to untaxed.

Growth in WHT collection from salaries was followed by almost 18pc increase in contracts and then imports 9.6pc. Inclusive of these three sectors, a total of nine major areas contributed around 84pc of total WHT collection. These were telephone, dividends, bank mark-ups, cash withdrawals, electric bills and exports.

For example, the WHT collection on dividends grew by 17.7pc in 2016-17, followed by 8.6pc in telephone services, 3.3pc in cash withdrawals and 1.2pc in electric bills. The WHT collection on bank mark-up dropped by 11.6pc followed by 2.6pc fall in collection on exports.

In its fiscal policy statement 2016-17 to the parliament, the finance ministry said the contracts had the largest share in WHT collections with a 28pc share or Rs260bn, followed by 21pc (Rs197bn) from imports and 12pc (Rs111.2bn) of salaries. As such, these three sectors together had a 60pc share or Rs568bn.

Direct taxes contribution was 40pc in total tax receipts of the Federal Bureau of Revenue (FBR) during 2016-17, slightly higher than the last year to stand at Rs1.343bn reflecting a growth of 13pc over the corresponding period last year. Direct taxes collection achieved 86pc of the original budgeted target.

Total revenue grew by 11pc during last fiscal year, but missed the budgeted target by about 7pc. As such, the total FBR collection during 2016-17 amounted to Rs3.361tr against the target of Rs3.621tr. The ministry attributed the failure to achieve tax targets to relief measures announced by the government for export sectors, particularly textiles.

Total tax revenue was recorded at Rs3.969tr against its budgeted target of Rs4.3tr, leaving a shortfall of about Rs331bn.

Among the non-tax revenue, major collections came from profits offered by the State Bank of Pakistan and mark-up from public sector entities. These two components had a combined share of 36pc in total non-tax revenue. In addition, one-off revenue of Rs100bn came from disinvestment of government stakes in Pakistan Security Printing Corporation and Rs64bn was mobilised from the sale of two LNG power plants under the Pakistan Development Fund.

The report said the tax-to-GDP ratio remained unchanged 10.5pc at the last year level as the pace of direct tax collection slowed down owing to decline in corporate profitability, particularly in the banking sector as well as reduction in sales tax rate, it claimed.

During 2016-17, total revenue increased to 15.5pc of GDP, said the report but lamented that the tax-to-GDP ratio had decreased from 18pc between 1992-96 period to 13.4pc during 2008-13.

Published in Dawn, February 20th, 2018