According to the Federal Board of Revenue, the share of withholding taxes in direct tax revenues touched 68pc in the first half of this fiscal year, emerging as the leading revenue spinner in the segment.
The current PML-N government has imposed 20 new withholding taxes since June 2013, while increasing the existing withholding tax rates for non-filers on the pretext of improving tax compliance.
Since then the number of withholding tax (WHT) categories rose to 56 from 36.
Mr Masoud Naqvi says the reliance on withholding tax as a revenue spinner is not good for the system. WHT should be phased out
WHT collected through economic agents is the easiest way to gather tax revenues, more than compensating for the failure to expand the income-tax net. As per estimates, over 49pc of the tax revenue is collected by private businesses that provide cost-free services. And their share continues to rise.
The time and effort saved is, however, not used by the tax authority to aggressively seek out non-taxpayers or even effectively monitor collection by its unpaid agents.
Instead, income-tax collection through demand creation — which involves the efforts of tax officials — has declined. One of the reasons for this is no audit for the past several years and the huge amount stuck in litigation.
Official figures show that withholding tax collection reached Rs405bn in July-December 2016 as against Rs372bn collected over the corresponding period last year, reflecting an increase of 8.87pc. The overall direct tax collection has increased to Rs600.10bn in the first half of the year as against Rs546.32bn over the corresponding period last year, up 9.84pc.
The remaining Rs195bn was received as payment with returns and advances: Rs22bn received with return by Dec 31, 2016. The remaining was collected as advance tax from taxpayers.
The FBR statistics show that over 90pc of revenue from withholding taxes is being generated from nine categories. These include imports, salaries, telephone, cash withdrawals, dividends, electricity bills, contracts and interest on bank deposits.
The maximum revenue was generated from goods and services, which stood at Rs97bn in the first half this fiscal year, followed by Rs91bn from imports, Rs45bn from salary income, Rs25bn from telephone subscribers and Rs24bn from dividend income, respectively.
Regional tax offices (RTOs) and large taxpayer units in four cities generate the bulk of WHT revenue — Karachi, Lahore, Islamabad and Rawalpindi. A negligible amount is collected at the remaining 11 RTOs across the country.
Withholding taxes were introduced in the 1990s to identify tax evaders. Former Tax Reforms Commission Chairman Masoud Naqvi said the concept of tax has eroded over time becoming an easy tax collection tool. It was originally designed to identify non-taxpayers and bring them into the tax net.
The withholding tax on cash withdrawals from banks was meant to identify people who dealt in heavy cash transactions but their names were not on the tax roll. This has yielded Rs14bn in the first half of the current fiscal year.
“We have proposed that this heavy reliance on withholding taxes — especially those that are presumptive in nature —be phased out gradually”, he said, adding it might not be possible to do away with it in one go. Mr Naqvi said the reliance on withholding tax as a revenue spinner is not good for the system.
Analysts say growth in Pakistan is mainly driven by rising consumption and contributes 89pc of GDP. It is growing at around 5pc annually.
As a result, consumption provides revenue-oriented policymakers with an opportunity to increase indirect tax collection.
Some studies also point out that the ever-expanding withholding tax regime is overburdening the corporate sector, which has to hire extra staff in order to comply with the complex mesh of regulations and laws. Businesses treat withholding taxes as expense and pass this burden on to their consumers, making the WHT an indirect tax.
Some of the withholding taxes on the end buyer have no refund mechanism. For example, the FBR charges over 15pc withholding tax on mobile cards. A person from the lower income category pays Rs15 as withholding tax on an Rs100 card, while this, by no means, falls in the category of a taxable income. There is a long list of such cases.
The scheme of differential taxation for filers and non-filers has been expanded to shore up revenues.
However, until Dec 31, 2016 only 847,000 people filed their tax returns, which was over 1m in 2015.
There are also concerns that despite their growing contribution to ‘direct taxes’, some withholding agents are not depositing the actual amount of tax they deduct at source from tax payers.