Withholding tax

24 Oct 2020

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PAKISTAN has one of the most inefficient, cumbersome and unfair tax systems in the world. The emphasis of tax policy has mostly been on revenue collection through indirect taxes, which stunts economic growth, burdens businesses by adding to their operational costs, discourages compliance, encourages evasion, etc. The obsession of the authorities with indirect taxation has grown to the point where more than two-thirds of income tax is harvested through the withholding regime owing to the ease in collection and without officials having to leave their offices. Sadly, many withholding taxes are imposed on consumption and unjustly burden honest taxpayers or those who are not required to pay tax on their incomes at all. For example, approximately 100m Pakistanis are forced to pay a hefty 12.5pc adjustable advance income tax as mobile phone users although a large majority earn far less than the income threshold that attracts (direct) tax. Such distortions in the system impede efforts to broaden the net. Apart from ease in collection, the lack of capacity of the officials of the Federal Board of Revenue to correctly assess the taxable income of a person has also increased their reliance on the regressive withholding regime. This can be gauged from the fact that the efforts of FBR staffers yield less than 5pc of the total income tax gathered in any given year.

Realising the gravity of the situation and the negative impact of withholding taxes on economic growth, businesses and individuals, Prime Minister Imran Khan has directed the FBR to scrap all “unnecessary withholding taxes” as part of its reorganisation for broadening the net for sustainable fiscal stability. With the future of the country’s economy tightly tied with the performance of the FBR, the elimination of regressive withholding levies is crucial to restoring public trust in the system and encouraging tax compliance. Rather than creating hardships for pensioners, widows, labour and others who don’t have taxable incomes, the FBR must focus on broadening the tax net. In this age of technology and abundance of data on the financial history of individuals, it should not be difficult for the tax authorities to assess incomes to ensure compliance and widen the net. The FBR claims to have a list of more than 3m wealthy people who live a luxurious life but who do not pay tax or file returns. It is high time the authority moved beyond sending such individuals notices and took punitive action against them.

Published in Dawn, October 24th, 2020