WITHHOLDING tax revenue continues to be the leading source of ‘direct tax’ receipts in view of the failure of tax authorities to effectively tap large undocumented sector of the economy and owing to its easier mode of collection through ‘withholding’ economic agents.

More than 56 per cent direct tax revenue comes from the withholding tax (WT) while relieving the tax authority from its prime responsibility of tax collection.

The WT revenue rose to Rs422.4 billion in fiscal year 2011-12 from Rs357.8 billion a year ago, recording a growth of 18 per cent. It was a mere Rs5 billion in 1991. Nine major withholding taxes contributed around 90 per cent of the total WT revenue.

Despite the WT’s growing contribution over time, there is ample proof with the tax department that withholding agents were not depositing the actual amount they deducted at source from the taxpayers. Many such cases were recently detected by tax authorities.

On the other hand, the revenue collection function of companies and banks etc has also created problems for withholding agents in terms of logistics and record-keeping.

The role of tax officials is only confined to ‘collection on demand’. For example, in 2011-12 the collection on demand was a mere Rs130 billion, not a respectable amount when compared to overall WT collection.

The collection on demand is largely confined to arrear collection, and much of this amount comes from voluntarily payment by taxpayers — Rs238 billion in 2011-12.

While the tax department is happy with this easy mode of collecting revenue, the WT regime has created many problems for the taxpayers and the department alike. In a recent study, Muhammad Imtiaz Khan, Secretary, Strategic Planning and Research & Statistics, Federal Board of Revenue (FBR), has detailed the WT-related problems in five different categories.

The ever-expanding withholding tax regime overburdens the corporate sector, which in order to fulfill its multiple obligations under the WT regime, has to hire extra staff. This not only adds to their cost of compliance but also results in duplication of work and at extra cost and without any incentive. Rather, for non-compliance of WT provisions, the withholding agents face punitive measures.

Regulations regarding ‘deduction-payment’ and filing of statements are complicated and time consuming. Some recent initiatives on this score still need to be consolidated. At the same time, the reporting of challans is defective.

Filing of individual challans is problematic in view of multiple clientele of the agents. In most cases, the agents do not include NTN’s and sales tax number on WT statements and challans. This causes problems in case of multiple challans and the out-station challans which are more cumbersome and tedious.

Similarly, the requirement for periodic filing of the statement causes hassle and needs review.

Documentation issues are beyond the control of the withholding agents. And due to lack of adequate tax education, small taxpayers find it difficult to meet their tax obligations in this regard.

Imtiaz Ahmad also listed a number of problems like the processing of withholding taxes, recording, jurisdictional issues, tax deposit issues, enforcement issues, accounting problems, etc for the tax department as well. With all these problems, the tax department is still promoting the collection of taxes through WT because tax officials are not willing to perform their duties, and they pass on the responsibility to the private sector.

But the government is not deterred by the aggravating problems. The budget 2012-13 has provided that the manufacturing sector will withhold 0.5 per cent tax from retailers and wholesalers which will be adjustable. The decision would add to the cost of business for the manufacturing sector in the current phase of deindustrialisation.

There are some reports that many businesses treat withholding tax as expense and pass on this burden to the consumers. The WT regime tends to redefine the ‘direct tax’, (if not its mode of collection) , in its actual impact.