Govt halves withholding tax rate

The business community was reluctant to come into the tax net, fearing harassment at the hands of the taxman

Shahbaz Rana July 12, 2015
The business community was reluctant to come into the tax net, fearing harassment at the hands of the taxman. PHOTO: AFP

ISLAMABAD: President Mamnoon Hussain signed an ordinance on Saturday hours after Prime Minister approved the measure to halve the withholding tax rate on all banking sector transactions valued at over Rs50,000 for a period of three months.

Finance Minister Ishaq Dar had earlier sought clearance on the move from PM Nawaz, who promptly sent his advice to President Mamnoon.

Read: President promulgates ordinance to reduce withholding tax rate to 0.3%

The ordinance is issued to give partial effect to a five-point agreement that the federal government and business community signed on Thursday. The business community was reluctant to come into the tax net, fearing harassment at the hands of the taxman.

After its promulgation, the rate of withholding tax on all banking transactions valued at over Rs50,000 is reduced from 0.6% to 0.3% with effect from July 11. The transaction tax is only applicable on non-filers.

Dar apprised the PM Nawaz about the agreement reached with traders’ associations and members of the business community regarding adjustment in withholding tax from 0.6% to 0.3% and other Federal Board of Revenue (FBR) related matters, said an official handout.

The 0.6% tax, levied with effect from July 1, was aimed at collecting Rs35 billion in taxes during the current fiscal year. At present, there are less than 880,000 income tax return filers in the country – a figure that is now expected to go up significantly.

Independent tax experts have also disapproved the 0.6% levy, terming it yet another tool of collecting taxes through measures without the efforts of the taxman. The tax is collected by the banks on behalf of the FBR.

Read: Govt, traders meet halfway on 0.6% withholding tax rate

For the last few years, the FBR’s reliance on such measures has dramatically increased, highlighting its inability to expand the income tax base in real terms. One of the main reasons behind low return filer number is a complicated information technology system of the FBR.

The agreement struck between the government and the business community is also expected to provide an opportunity to expand the size of the formal economy, provided the FBR fixes its issues.

Under the agreement, the government will reduce the rate to 0.3% till September 30. During this period the traders will file income tax returns. The agreement also enlists reducing the minimum turnover tax rate for various trades besides setting a minimum retail price. The last point of the agreement deals with simplification of tax return forms.

However, the ordinance covers only the first two points of the agreement, which deals with the withholding tax rate and its implementation period. The government has not provided legal cover to points three and four of the agreement that deal with minimum sale price and minimum turnover tax, respectively.

A senior official of the FBR said due to paucity of time the details of the turnover tax could not be worked out. However, it will now be finalised after the Eid holidays.

The standard turnover tax is 1% and the FBR charges Re1 on every Rs100 sale, irrespective of what the profit margin is. This has prompted traders operating benami accounts into hiding their sales.

Once the traders truly declare their sales, their turnover tax liabilities will increase manifold due to the size of transactions. The government has now given a written assurance that the new turnover tax rate will be far less than 1%.

Read: Taxing private security firms

After the Eid holiday break, government officials and representatives of traders will sit down again and try to hammer out sector-specific turnover tax rates, said the officials.

Published in The Express Tribune, July 12th, 2015.

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