Federal Tax Ombudsman Directs FBR to Conduct Audit of Banks for Withholding Tax Compliance

Federal Tax Ombudsman Directs FBR to Conduct Audit of Banks for Withholding Tax Compliance

Islamabad, June 22, 2023: The Federal Tax Ombudsman (FTO) has directed the Federal Board of Revenue (FBR) to regularly conduct audit of banks to check compliance with the withholding tax provisions.

The FTO also directed that the withholding tax audit under Section 161 of Income Tax Ordinance, 2001 should be kept separate from amendment under section 122(5A) to effectively monitor and audit withholding tax deduction.

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The FTO issued these directives in an own motion in withholding tax monitoring case.

The office of the FTO observed that in-house studies based on external and internal exercises conducted by tax and audit authorities revealed systematic gaps and loopholes in the prevalent withholding tax monitoring and payment system in the banking sector.

“It was found that commercial banks in Pakistan normally avoid field audits of withholding taxes on one pretext or another on the grounds, that banks have developed centralized and credible software for tax withholding and that withholding audit will trespass into the privacy and confidentiality of their client’s data,” it is observed.

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The tax authorities were denied access to critical important and meaningful document namely general ledger which contained designated tax accounts for withholding tax purposes.

The FTO observed that with the current stream of online banking system, the said designated / tax ACs witness multiple transactions each day and like ordinary customers FBR can ask for reporting alert (linked with all deposits/withdrawals).

This facility (which is available to an ordinary A/C holder) can strengthen FBR in ascertaining tax inflows and in case of any break or delay, timely intervention can be made.

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Therefore, strict monitoring of such withholding ledger tax A/Cs (exclusively meant for tax deduction/collection) is required to detect tax leakages in banks withholding regime specially under Section 151 (profit on debt) and other deduction at source regime like Section 149 (salary), 152 (payment to non-resident), 153 (payment for goods, services and contracts), 155 (income from property) and others so as to ensure that each and every branch of the banking companies is regularly collecting the withholding tax at prescribed rates and finally, remitting the same into state treasury within the stipulated time.

It is also observed that the current withholding audit regime in banking system was confined to examination of withholding statements only which were filed by the banks and not by any third party.

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The FTO in its findings stated that the undertaking of new initiatives by the FBR on SWAPS and Business Process Re-engineering reinforce premise of the instant Own Motion investigation that systematic gaps and loopholes exist in the prevalent withholding tax monitoring and payment mechanism and that integrated, automated response is required to bridge these gaps through strengthening legal and enforcement mechanisms and inducting digital mode and portals in processes and systems for real-time feedback and responses to all the stakeholders particularly the regulator for timely remedial and corrective action.