Withholding tax conundrum

GOVERNMENTS all over the world impose taxes to raise revenues to be able to incur expenditures on development and strengthening the economy, through a sustainable process of growth, with the ultimate objective of promoting well being of the people. Generation of additional resources through taxes for the ever increasing needs to achieve these objectives, therefore, is an indispensible and the most desirable policy initiative and the only way to improve the tax to GDP ratio. In Pakistan, regrettably, the tax GDP ratio is dismally low. In comparison to 39% in UK, nearly 27% in USA, European countries and Japan and 17% in India it stands at slightly over 9%. Enhancing and diversifying of tax generating avenues, broadening the tax base and documentation of the economy are of pivotal importance in regards to lifting the tax GDP ratio and the generation of revenues from internal sources. There is a national consensus on broadening of the tax base by bringing more and more segments of the society, business concerns and individuals into the tax net. But unfortunately whenever an effort is made by the government in that direction, the move is resisted by the business community as well as the opponent political parties in a show of solidarity with the business community and the people likely to be targeted by the new proposal just to extract political mileage.

It is believed that the informal economy of Pakistan is far bigger than the formal economy which indicates how much tax potential exists in the country which needs to be tapped to get rid of the perennial problem of budget deficit which is the mother of all economic ills. It goes to the credit of the present government that in spite of existence of myriad of debilitating factors and dismal state of the economy it has reduced the budget deficit from 8.4 % to 3.1% within the span of two and half years through prudent management and rational structural reforms. The economy as a whole has shown visible signs of recovery which has not only been corroborated by SBP reports but also endorsed by the international lending institutions and rating agencies.

The budget for 2015-16 presented by the PML-N government envisaged a strategy for increased reliance on broadening of the tax-base and consolidating the economic gains of the last two years. A conscious effort was made to expand the tax net through the imposition of 0.6% withholding tax on banking transaction for the non-filers of the tax returns. It is a reality that in our country there is a well entrenched culture of tax evasion and as such the government cannot rely on only persuasive and voluntary mechanisms to encourage and enhance the taxbase. A well-planned and a fool-proof mechanism and steps are required to achieve the desired results. The imposition of withholding tax on banking transactions made by the non-filers was undoubtedly a move in the right direction designed to force the people who were earning taxable income and not paying taxes to contribute to the government revenues to fulfill their national obligations.

But unfortunately the business community of the country instead of supporting the government move rejected the withholding tax out rightly which now has become a contentious issue between them and the government. They threatened launch a country wide protest against the proposed fiscal measure notwithstanding the fact that the finance minister repeatedly made it clear that the new tax proposal was targeted against those who were capable of paying the tax but somehow manage to stay away from the tax net. This reaction by the business community is quintessential of the culture of resistance to taxes without any justification and the steps to document the economy. The government with a view to resolve the issue amicably and taking the business community on board decided to hold negotiations with the business community. Accordingly the Finance Minister engaged the representatives of the business community in a dialogue on FBR related issues including the imposition of 0.6% withholding tax on 8-9th July and a nineteen member committee comprising representative of traders, Chambers of Commerce and FBR was tasked to deliberate on the issue and make recommendations. The committee reached an agreement on (i) reducing the withholding tax to 0.3% for non-filers up to 30th September (ii) filing of tax returns by the non-filers for the outgoing years by 30th September (iii) Extension of schedule-III in regards to sales tax to be considered on case to case basis (iv) determination of turn over tax according to various trade and sectors between FPCCI and FBR (v) FBR and business community shall hold in depth and meaningful parleys to resolve the issues related to filing of taxes. The banks were accordingly advised to deduct the withholding tax at the rate of 0.3 % and make refund in cases where it already had made deductions at the rate of 0.6%.