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Withholding taxes

February 22, 2018


THERE is little doubt that the present government has taken some strides towards lifting the revenues of the government during its five years in office, but the rub lies in seeing how this has been achieved. The total revenue collected by the government since FY2013, the last year of the preceding administration, rose by 65pc till FY2017, representing an average growth of 13pc per year. This outstrips inflation by a wide margin and can only be attributed to an aggressive revenue effort. Unfortunately, though, the widening of the taxation base has not kept pace; this means that incremental revenues have been squeezed out of those within the tax net more than through mobilising new taxpayers. This is the case although the current rulers have launched more amnesty schemes than the preceding two governments, besides committing themselves to broadening the tax base through serving notices to those identified by the tax authorities as people leading a lavish lifestyle while filing no returns.

The number of people filing tax returns has increased, but the figure is nowhere near what it should have been by now. Moreover, recent data from the finance ministry shows that withholding taxes account for 67pc of all direct tax collections in FY2017, representing a growth of 13pc, the same as the average growth of revenues over the five-year term of the government. According to the report of the finance ministry, shared with parliament, there was a growth of 21pc in salaries paid this year, accounting for a large part of this increase. Additionally, the government has resorted to this measure perhaps more than any other, applying withholding taxes to bank transactions as well as imports, since it presents the path of least resistance. Lately, this measure has been supplemented with regulatory duties, which are packaged as import compression measures, but are more likely motivated by revenue considerations. This may be an aggressive revenue effort, but it is highly regressive, and not likely to yield incremental revenues for much longer. For decades, it has been understood that widening the taxation base is what is needed to break away from the ever-shrinking revenue base to which the state is tethered. The government may have the numbers to show for its revenue effort, but it has little to no bragging rights considering how these numbers have been achieved.

Published in Dawn, February 22nd, 2018