Withholding Agents Helping FBR in Tax Collection

WITHHOLDING AGENTS, HELPING FBR WITHHOLDING AGENTS, HELPING FBR IN TAX COLLECTION By M. Iqbal Patel, Chartered Accountant, Karachi The Federal Board of Revenue (FBR) year book revealed that it has set an ambitious growth budgetary target for the fiscal year 2012-13 at Rs.2,381 bln which is 27% higher than out going year's collection of Rs.1, 883 bln. However, the figure of Rs.1,883 bln stated in the FBR Year Book is short by Rs.70 bln compared to the amount of Rs. 1,953 bln mentioned in the budget document. This challenging revenue collection target may prove unrealistic if the FBR fails to take measures which are necessary for its achievement. The measures to be focused are improvement of tax system, withdrawal of the exemptions allowed under the Income Tax Ordinance, 2001 (Ordinance) which burden the poor taxpayers disproportionately and prompts tax evasion too. Further sustained tax policy measures are required to strengthen administration including a significant step-up in the FBR's enforcement activities to contain tax evasion, simplify the tax system and render it more equitable bringing the elite class within the documented regime. Presently the FBR's main reliance in collection of direct taxes is on withholding tax regime. The contribution of withholding taxes (WHT) in the overall achievement 'of the budgetary target for financial year 2011-2012 remained at 59.8 % and voluntary tax payments was 29%. The field tax officers are not directly involved in direct tax collection of 85% of the gross revenue. Moreover, more than 90% of the budget of Regional Tax Offices (RTO's) is met out of withholding taxes. If the Policy Board compares the contribution of the field tax officers in collection of rest of around 15% and the RTO's 10% of the overall budgetary targets from other than WHT sources, with the operating expenditures incurred on the tax departments, it may lead to an interesting conclusion on the value of their existence. Keeping in view the importance and lion's share in the ,budgetary target of WHT an independent Director 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 key role in monitoring of WHT in the field formations. The revenue implications of withholding tax collection under the set-up of DGWHT through monitoring and management of WHT by the RWU's in the FY 2011-12 was Rs.19,917 bln. for failure to pay tax and default surcharge. The WHT so collected by the DGWHT was only 4.72% of total collection of Rs.422.4 bln by the withholding agents during 2011-2012, if compared with the operating expenditures incurred on the set-up of the DGWHT; it may jeopardize its survival. This apprehension gets further support from the fact that the FBR has recently taken a decision for closure of RWU's at RTO's. This decision may also be attributed to a huge gap of around Rs.8, 793 bln between the withholding tax demand of Rs.28.711 bln and actual recovery of mere Rs.19,917 bln during FY 2011-12. This dip in revenue and decreasing trends of WHT reflect ineffective monitoring mechanism in RTO's and LTU's. The field tax officers may justify their existence on the ground that they recovered a record amount of over Rs.19 bln through their strict monitoring enforcement and audit of withholding agents during the FY 2012. In this connection it may be noted that the withholding agents who found defaulters in compliance with the provisions of the WHT were mainly government departments, Tehsil Municipal Administration and Pakistan Post Office etc. There are habitual defaulters such as Karachi Electric Supply Company (KESC) which collected WHT amounting to Rs.890 mln under section 235 of the Ordinance 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. Recently once again the RTO served them under section 161 to deposit Rs.890 mln tax withheld from the electricity consumers but same was not deposited as required under section 160. However, delay in the initiation of recovery proceeding against the KESC by the RTO at a time when the amount involved accumulated to such a high level, is questionable. The law of withholding tax dates back to Income Tax Act, 1886 which divided the income for the purposes of taxation into four classes; (i) salaries (ii) interest on securities (iii) profit of Joint stock companies (iv) other income. All of the classes were taxed @ 2% of the income. Only taxes, on salaries and interest on securities were collected at source. After independence of Pakistan, the Indian Income Tax, 1922 continued as tax law in Pakistan till June 30th, 1979 when The Income Tax Ordinance, 1979 was enforced which contained 25 provisions of withholding tax. These provisions were reduced to 14 in the draft of newly introduced Income Tax Ordinance, 2001. The FBR has collected Rs.422.4 bln as WHT in FY 2011-12 against Rs.357.8 bln in FY 2010-2011 indicating a healthy growth of 18%. It prompted the FBR to add two more provisions through the Finance Act, 2012-2013 in respect of deduction of tax from payments to traders and distributors and Advance Tax on sale or transfer of immovable property under sections 153(A) and 236C of the Ordinance respectively, thereby it has increased WHT provisions again to 25. It reflects on one hand the increasing reliance on withholding taxes by the FBR owing to its easier mode of collection through with-holding agents and failure of FBR on the other in enforcing compliance process effectively to tap large undocumented sector of the economy. The interesting aspect of WHT Regime is that out of 25 sources of income which are subject to withhold taxes, 9 sources contributed over 92% of WHT collection. This situation suggests that FBR should review the other 16 provisions for abolishing them from the Ordinance. The withholding tax regime (PTR) proves counter productive, for instance the WHT on profit of debts contributed higher growth of 43.4% in FY 2012 indicating that people are reluctant in investing in industrial, commercial sectors, thus restricting economic growth and employment opportunities. Similarly high growth of WHT from dividends at 46.8% is a pointer of shrinking of investment opportunities and the fact that companies are not retaining profit for investment in new ventures but are distributing profits among their shareholders. The people are attracted where the tax withheld is treated as final tax as is the case under above two cases. The withholding tax regime has created number of problems for withholding agents and the taxpayers too. The tax withheld under most of the WHT provisions is adjustable against the final tax liability determined as payable on final assessment of the taxpayer, which results in number of cases of refunds, because tax withheld is in excess to the actual tax liability of the taxpayer, which ultimately fuels corruption in claiming the refund. Besides there are other problems confronted with by the withholding agents in compliance with the provisions of WHT. In view of lack of tax culture in the country and the feeling of taxpayers that taxes paid by them are mercilessly spent by those who are at the helm of the power and who do not pay any tax themselves, the withholding agents, find it difficult to persuade the payers for deduction of tax and obtaining their CNIC No. and NTN. Further the withholding agents are required to hire additional staff for preparing challans, deposit of 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. The withholding agents are rendering tax collection services on behalf of the FBR free of cost. The FBR does not recognize their services but rather they 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. The FBR should launch a program to educate the taxpayers and create an environment of tax culture satisfying them that income taxes paid by will be utilized for providing them welfare services. The Federal Board of Revenue Act, 2007 requires the FBR to promote voluntary tax compliance and make it a service oriented organization, and to implement comprehensive policies and programs for the education and facilitation of taxpayers etc. It is often said that death and taxes are inevitable. However, there are a thousand ways to die and at least an equal number of ways to tax. Withholding tax is one of them. This noble system is designed and gaining popularity in the Government for revenue generation. Withholding tax regime may be defined in the following words: "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 merciless consumers (Government)".