A number of withholding taxes will either be abolished or reduced in the upcoming budget (2022-23), high-ranking officials in the Federal Board of Revenue (FBR) told Propakistani.
The revenue loss on account of the withdrawal of the withholding taxes will be compensated through the revision in income tax slabs for the salaried class, and other revenue measures to be taken on the direct taxes side in the budget (2022-23), the sources revealed. Additionally, the basic purpose of the exercise is to reduce the cost of doing business and trade facilitation.
Under the budget preparation exercise, the FBR will pick the withholding taxes with fewer revenue implications without compromising the objective of documentation. A new Directorate-General for Synchronized Withholding Agents System will also be established to document withholding transactions in the future.
The FBR will reduce the distortions caused by the withholding taxes. All the withholding taxes will be reviewed to determine the distortions caused by the withholding of income tax, and adjustments will be made to eliminate them. This will be accomplished by ensuring that all the collected withholding tax is either claimed in the return filed against tax demand or refunded.
The government had withdrawn 12 withholding taxes during the budget (2021-22), including the collection of taxes on the payment of royalties to residents, cash withdrawal, banking instruments, and banking transactions other than through cash; the collection of taxes from persons remitting amounts abroad through credit, debit, or prepaid cards; the collection of taxes on domestic and international air travel, and the extraction of minerals members by a stock exchange registered in Pakistan; the collection of tax on marginal financing by the National Clearing Company of Pakistan Limited (NCCPL), and CNG stations; and the collection of taxes on certain petroleum products.
There were 38 withholding tax provisions in the Income Tax Ordinance, 2001. This high number of provisions creates more complexity and an undue burden of compliance on different withholding agents. It also impacts the country’s rating on the ease of doing business index. Additionally, 12 withholding taxes were omitted in the last budget in an effort to augment the ease of business and simplify the tax laws.
The Overseas Investors Chamber of Commerce and Industry (OICCI) had proposed that the Withholding Tax (WHT) regime should be revamped and reduced from the existing over 26 to five rates only for filers, and that this tax should be applicable to inactive taxpayers only.
Alternatively, the WHT rate applicable on services at the rate of eight percent is a minimum tax regardless of the actual taxable income of the service provider. This tax effectively becomes an indirect tax and increases the cost of doing business for service providers, which is why the tax on services should be made adjustable.
The OICCI budget proposals added that withholding tax deduction u/s 153 (1)(a), which is currently considered as minimum tax for all the suppliers (except manufacturers and listed companies), should be made adjustable for at least the corporates on the inactive taxpayers’ list.