Currently, the Federal Board of Revenue relies mainly on withholding tax for collection of direct taxes.
The share of withholding taxes (WHT) in the overall target for financial year 2011-12 was at 59.8 per cent of the total direct tax while voluntary payments were 29 per cent.
The field tax officers were not directly involved in direct tax collection of 85 per cent of the gross revenue. About 90 per cent of the budgeted target of Regional Tax Offices (RTO’s) was met by withholding taxes.
If policymakers compare the contribution of the field tax officers and RTOs in the budgetary targets from other than WHT sources, with the operating expenditures incurred on the tax departments, it may lead to an interesting conclusion on their cost-benefit ratios.
Keeping in view the growing importance of WHT, an independent Directorate General of Withholding Taxes (DGWHT) came into being in 2007.
DGWHT is primarily responsible for handling the issues of monitoring and managing functions duly approved by the FBR. The WHT issues are handled at Large Tax Units (LTU) and RTO’s level through Regional Withholding Units (RWU’s) which play a key role in monitoring of WHT in the field formations.
The revenue implications of withholding tax collection under set-up of DGWHT through monitoring and management of WHT by the RWU’s in the FY 2011-12 was Rs19,917 billion under sections 161 and 205 for failure to pay tax and default surcharge respectively of the Ordinance. The WHT so collected by the DGWHT was only 4.72 per cent of total collection of Rs422.4 billion by withholding agents.
The FBR has recently decided to close RWUs at RTOs. This decision may also be attributed to a huge gap of around Rs8, 793 billion between the withholding tax demand of Rs28.711 billion and actual recovery of mere Rs19,917 billion.
This reflects ineffective monitoring mechanism in RTOs and LTUs.
The field tax officer may take credit that they recovered a record amount of over Rs19 billion through strict monitoring, enforcement and audit of withholding agents. However, the withholding agents who found defaulters in compliance with the provisions of the WHT were mainly government departments, Tehsil municipal bodies, Pakistan Post Office, etc.
There are habitual defaulters such as KESC who collected WHT amounting to Rs890 million under section 235 from the commercial and industrial consumers but did not deposit the tax so collected into the government treasury as required under section 160 of the Ordinance. The RTO has served the utility under section 161 to deposit Rs890 million tax withheld from the electricity consumers.
However, the delay in the initiation of recovery proceeding by the RTO when the amount involved accumulated to such a high level is questionable.
The WHT has recorded a healthy growth of 18 per cent last year. It prompted the FBR to add more two provisions through the Finance Act 2012-13 in respect of deduction of tax from payments to traders and distributors and Advance Tax on sale or transfer of immovable property u/s 153(A) and 236C of the Ordinance respectively; it has there by increased WHT provisions again to 25.
It reflected increasing FBR’s reliance on withholding taxes owing to its easier mode of collection through withholding agent and the failure of the FBR to effectively tap large undocumented sector of the economy. The interesting aspect of the WHT regime is that out of 25 sources of income which are subject to withholding taxes, only nine major sources are tax-spinners contribute over 92 per cent of WHT collection. This situation suggests that the FBR should review the provisions of other 16 WHT for abolishing them from the Ordinance
The withholding tax regime is counter productive; for instance, the WHT on profit from debts witnessed a high growth of 43.4 per cent in FY 2012 indicating that people are reluctant in investing in industrial and commercial sectors that restricted economic growth and employment opportunities. Similarly, the high growth of WHT from dividends at 46.8 per cent points to shrinking of investment opportunities since the companies are not retaining profits for investment in new ventures and are distributing their profits among their shareholders. People are attracted where the tax withheld is treated as final tax as is the case in the above situation.
The withholding tax regime has created a number of problems for withholding agents as well as taxpayers too.
The monies withheld under the most of the WHT provisions are adjustable against the final tax liability determined as payable on final assessment of the taxpayer; it results in piling up of refund cases because of tax withheld in excess of their actual tax liability which ultimately fuels corruption in refund claims by the taxpayers.
Besides, there are other problems faced by the withholding agents in compliance with the provisions of WHT.
The tax payers do not find any benefit accruing to them as they observe that much of the tax revenue received by the government is not properly spent. This nurtures a poor tax culture. The withholding agents, therefore, find it difficult to persuade the payee for deduction of tax and obtain CNIC No. and NTN from them.
The FBR should launch a programme to educate the payees and promote tax culture satisfying them that income taxes paid by them will be utilised for welfare services. The Federal Board of Revenue Act 2007 requires the FBR to promote voluntary tax compliance and make it a service oriented organisation, and to implement comprehensive policies and programmes for education and facilitation of taxpayers, etc.
Further, the withholding agents are required to hire additional staff for preparing challans, deposit of the tax withheld in time, preparing and filing of periodical withholding tax statements within the prescribed time, etc., as required under various provisions of the Ordinance.
These activities add to the cost of doing business, time and energy.
The withholding agents are rendering tax collection services on behalf of the FBR free of cost. The FBR does not recognise their services. Instead, the withholding agents are made subject to punitive measures besides harassment by the tax field officers under the cover of strict monitoring and enforcement and audit for recovery of levy.
“Withholding tax is a tax, collected/deducted by the cost-free machinery (withholding agents) from the payments made to the hard earners of income for reckless consumers (government)”