The Federal Board of Revenue’s (FBR) heavy reliance on withholding taxes (WHT) is evident from the fact that the withholding taxes continued to contribute 72 percent to the total income tax collection during the Fiscal Year 2020-21.
According to the FBR’s data (2020-21) available with ProPakistani, the withholding taxes remained the major contributor, with 72 percent share, of the total collection of income tax. The WHT collection during the FY 2020-21 stood at Rs. 1,237.1 billion against Rs. 1,091.7 billion in 2019-20, indicating a growth of 13.3 percent.
Ten major components of withholding taxes, contributing around 85 percent to the total WHT collection, are contracts, imports, salary, telephone, dividends, bank interest, cash withdrawal, technical fee, electricity, and exports. With the exception of WHT on technical fee and cash withdrawals, all other major items recorded positive growth.
WHT from salaries remained at the top, with 17.3 percent growth in collection, followed by dividends and telephone 15.6 percent each and electricity 12.8 percent. Another major contributor, WHT from contracts also showed significant growth at 14.6 percent, FBR said.
In 2019-20, the WHT contribution percentage was also the same.
The collection of income tax is not only highly skewed in favor of withholding taxes but is also heavily reliant on few items. Out of 256 withholding items, 10 major items contribute around 85 percent of the total withholding collection. The highest contributor in withholding taxes is the contracts with 22 percent share, followed by imports (17.7 percent) and salary (12.3 percent).
The share of only three heads of WHT, i.e., contracts, imports, and salaries is more than 52 percent, thus making income tax revenue vulnerable to variation in these heads. Therefore, it is essential that along with expanding the tax base, efforts are also made to broaden the withholding tax base.
The share of the Collection on Demand (CoD) in total income tax at 4.6 percent remains meager. However, significant efforts were made during FY 2020-21 to enhance the contribution of CoD which provides a true reflection of the efforts made by FBR field offices to enhance revenues and curb tax evasion. During the FY 2020-21, the overall collection from CoD stood at Rs. 80.1 billion against Rs. 60.8 billion collected in the previous year, showing a growth of 31.8% percent over the previous year.
Recovery from arrear demand has shown substantial growth of around 75 percent, whereas the current demand increased by 19.9 percent. To further improve this trend, a thorough desk audit by the field formations can prove beneficial in increasing the share of CoD in the overall income tax collection.
FBR further revealed that the head of advance tax/payments with returns included payments made with returns and advance income tax collection. Rs. 465.8 billion has been collected during the FY 2020-21 as compared to Rs. 404.5 billion in the FY 2019-20 under this head. A major contribution has come from advance tax collection with Rs. 411.7 billion against Rs. 348.1 billion in the FY 2019-20, registering a growth of 18.3 percent.
Under the head payments with returns, Rs. 54.1 billion has been collected during the FY 2020-21 against Rs. 56.5 billion in FY 2019-20, showing negative growth of 4.3 percent. The negative growth could be attributed to the decline in taxable incomes during FY 2019-20 due to COVID-19 lockdowns, FBR added.
The direct taxes have contributed 36.5 percent to the total tax collected during FY 2020-21. The net collection stood at Rs. 1,726 billion, reflecting a growth of 13.3 percent over the previous fiscal year collection of Rs. 1,523.4 billion. An amount of Rs. 91.3 billion has been paid back as a refund to the claimants in FY 2020-21 as against Rs. 68.6 billion during FY 2019-20.
Sales tax remained the top revenue-generating source of FBR, occupying about 42 percent share in the total collection. At around 24 percent, sales tax recorded healthy growth during FY 2020-21. In absolute terms, Rs. 1,981.4 billion has been collected, which is Rs. 384.5 billion higher than the amount collected in 2019-20.
Further breakup reveals that the sales tax at the import stage has recorded a substantial growth of 27.6 percent, whereas collection of sales tax at the domestic stage has also grown by an impressive 19.8 percent, the FBR analysis revealed.