KARACHI: There are certain loopholes in collection of withholding tax following in meeting of withholding obligations by the taxpayers and the withholding agent deduct the taxes but do not deposit in government treasuries on time despite this defaulters are free from all penalties, said a report prepared by officials of Federal Board of Revenue (FBR).
This WHT regime provides considerable documentation to the economy, it covers all the citizen making transactions, indiscrimination and the government uses such taxes as a means to combat tax evasions moreover, these taxes prevent considerable escapement of income which is endemic.
The deduction of withholding tax or advance taxes contributes 50 percent of the total direct taxes revenue. In 2011-2012 direct taxes stood at 57 percent, increase from Rs5 billion in 1991 to above Rs247 billion in 2009 showed exponential growth and consequential heavy reliance on withholding taxes in Pakistan, the report said.
According to the FBR figures WHT collection during fiscal year 2011-2012 was at Rs422.4 billion against Rs357.8 billion during FY 2010-2011 indicating a growth of 18 percent.
“Around 90 percent of total WHT from the sources including contracts, imports, salary, telephones, export, bank interest/securities, cash withdrawal, dividends and electricity.” The highest growth in WHT collection has been dividend (46.8 percent), bank interest (43.4 percent), salary (25.8 percent), imports (28.5 percent), and telephone (33.9 percent), according to the FBR figures.
To avoid any clash between the taxpayer and agents who are collecting taxes, they are obliged to issue a certificate of collection or deduction of tax under the ordinance to the person from whom the tax has been collected or to whom the payments has been made. The certificate will carry the amount of tax and other prescribes particulars. (This certificate will be submitted by the taxpayer with the return of the total income) according to Section 164 of the Income Tax Ordinance, 2001.
At the time of collection or deduction of tax (not later than fifteen days after the end of the financial year or within seven days of request made by the person whose tax has been deducted Rule 42 of the Income Tax Rules, 2002.
Resorting to Rule 44 (4) and subsequent action under section 161 and 205 discrepancies found through scrutiny need to be confronted to the withholding agent by issuing notice under Rule 44(4) of the IT Rules 2002, and obtaining reconciliation under the said Rule from the taxpayer.
The record of document to be examined including returns of income, audited accounts, annual and monthly statements of WHT and monthly sales tax returns. Statements and invoices filed with Inland Revenue Services (IRS) and Pakistan Customs Services (PCS) can also be examined for detection of evasion, if any.
It explained the rationale that withholding taxes solve the cash flow problems of the government. It would be convenient for the taxpayers to pay withholding tax from source income in form of installments to avoid annual tax burdens.