Audit report highlights massive withholding tax shortfall and urges swift recovery proceedings
ISLAMABAD: The Federal Board of Revenue (FBR) is under pressure to accelerate the recovery of more than Rs45.38 billion in unpaid withholding taxes after audit findings revealed widespread non-compliance by over 1,300 withholding agents across the country.
The issue surfaced during an audit of fiscal years 2022-23 and 2023-24, which found that numerous withholding agents failed to deduct taxes on payments made to suppliers, contractors and service providers. The findings have raised concerns over tax enforcement and revenue leakages at a time when Pakistan is seeking to strengthen its fiscal position and improve tax collection.
Audit Identifies Rs45.4 Billion Tax Shortfall
According to the audit report, 1,344 withholding agents operating under 19 FBR field formations failed to deduct withholding tax as required under the law. As a result, auditors estimated a non-recovery of Rs45.388 billion, highlighting significant weaknesses in tax administration and compliance monitoring.
Under Section 153 read with Section 161 of the Income Tax Ordinance, 2001, withholding agents are legally obligated to deduct tax at source. Failure to deduct or deposit the tax makes the withholding agent personally liable for the unpaid amount through legal proceedings initiated by the Commissioner Inland Revenue.
The audit observations were reported to the relevant authorities between February and November 2024.
Recovery Efforts Remain Limited
In its response to the audit, the FBR stated that only Rs2.41 million had been recovered so far. The tax authority informed auditors that legal proceedings had been initiated to recover the remaining Rs45.386 billion, but the cases were still pending finalisation.
The minimal recovery has drawn attention to delays in enforcement and concerns regarding the effectiveness of the existing withholding tax administration framework.
DAC Directs FBR to Expedite Proceedings
The Departmental Accounts Committee (DAC) reviewed the matter during meetings held between July 2024 and January 2025. The committee instructed the FBR to expedite legal proceedings and submit compliance reports to both audit authorities and tax administration officials.
However, the audit report noted that no meaningful progress had been communicated by the department before the report was finalised, raising questions about the pace of recovery efforts.
Auditors Recommend Stronger Enforcement
To address the issue, auditors recommended that the FBR immediately finalise pending legal proceedings and strengthen enforcement through Commissioners Inland Revenue responsible for withholding tax administration.
The report also called for the implementation of the Synchronized Withholding Administration and Payment System (SWAPS) to improve monitoring, compliance and tax collection. Auditors said periodic system reviews and technological enhancements could help identify weaknesses and reduce future revenue leakages.
Importance of Withholding Tax Collection
Withholding tax remains one of Pakistan’s most important revenue streams, allowing the government to collect taxes at the source of transactions. Tax experts believe stronger enforcement, improved digital monitoring and timely legal action are essential for enhancing compliance and broadening the tax base.
The recovery of more than Rs45 billion in pending taxes could provide a significant boost to government revenues, particularly as Pakistan faces ongoing fiscal challenges and seeks to improve budgetary performance.
Analysts say the outcome of these recovery proceedings will serve as an important test of the FBR’s ability to strengthen tax enforcement and improve overall revenue administration in the coming years.
