The current tax structure with a heavy reliance on withholding taxes is a challenge in increasing the tax-to-GDP ratio to 15%. PHOTO: FILE
Around 70% of the total income tax collected by the Federal Board of Revenue (FBR) from July through September has come from withholding agents belonging to private sectors.
The revelation casts a huge question mark on the use of FBR’s workforce and their contribution in collection.
Out of the Rs242.8 billion in income tax collection from July to September, Rs171 billion were collected as withholding tax by agents acting on behalf of the government, showed official documents, underscoring the need to revamp the existing structure that has become an obstacle in broadening the tax base. Withholding taxes are indirect in nature.
While private individuals collect majority of the tax, officials are enjoying a rather easy ride. Out of the 20,345 workforce, as many as 13,212 or roughly two-thirds belong to Inland Revenue Service that deals in income tax and sales tax.
The disclosure comes at a time when the government is actively considering reshuffling the entire top bureaucracy of the FBR to improve its performance. Independent experts say that top-level changes alone would not yield desired results, until the government brings structural changes.
Barring the collection of withholding taxes at the import stage by collector of customs, the entire sum on account of withholding taxes was pooled by agents, mainly banks, power distribution companies, telecommunication companies, exporters, importers, stock exchange, manufacturers, education institutions and the employers.
Extra work?
This has also increased the burden on compliant taxpayers who are forced to not only pay their own taxes but also collect from others on behalf of the government and deposit in the kitty. In its report, the Tax Reforms Commission (TRC) has recommended that the FBR should simplify the withholding tax regime and compensate withholding agents by paying at least 0.1% of tax withheld to them.
The report further states that the current tax structure with a heavy reliance on withholding taxes is a challenge in increasing tax-to-GDP ratio to 15%. Pakistan has the lowest tax-to-GDP ratio in the world and lags behind regional peers as well.
The government blames people for the low tax base. However, the TRC report shows tax structure is the actual obstacle. “The tax mix has to change with very serious efforts on broadening and deepening the tax base,” it recommends.
FBR’s ploy
The TRC further states that field units of FBR hide behind the façade of withholding taxes to show higher tax collection of their unit. “This misrepresents the actual effort of the field units in tax collections. It recommended that the tax withholding credit should be centralised and field units should only be given credit for tax collected through their efforts.”
The government is collecting withholding taxes on school fees, salary, imports, exports, commission and brokerage, dividend, contracts, profit on debt, utilities services like telephone, electricity and internet, vehicles tax, stock exchange-related provisions and non-residents at varying rates.
Through the Finance Act 2014, the FBR has introduced the distinction between filer and non-filer aimed at compelling people to come in the tax net.
However, this has become an easy source of generating money for the FBR, which also hides its lax enforcement and inefficiencies.
For instance, from July through September the government collected Rs40.7 billion withholding tax on imports, which is treated as income tax collection. Every consignment is cleared by paying this tax, which the importers build in the cost of the product and do not pay from their incomes.
World over, education is treated as a fundamental right but the government has imposed withholding tax on education fees. It collected Rs48 million from those who paid fees of their children studying abroad. In addition to that, it also collected Rs287 million withholding tax on domestic tuition fees.
Published in The Express Tribune, October 16th, 2015.
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