Foreign investors in Pakistan are urging for a simplified withholding tax regime in the upcoming budget for 2023-2024.
The Overseas Investors Chamber of Commerce and Industry (OICCI), which represents foreign investors in the country, has submitted its recommendations to the Federal Board of Revenue (FBR) for consideration in the budget.
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The OICCI highlights the current complexity of the withholding tax rates, which vary based on the nature of transactions and the legal or tax status of the parties involved, including whether they are corporate or non-corporate and active or non-active taxpayers. The chamber asserts that simplifying the withholding tax system is essential to enhance convenience and business friendliness.
The FBR’s annual yearbook for 2021-2022 reveals that there are a total of 49 sections of withholding tax under the Income Tax Ordinance, 2001, resulting in a tax collection of approximately PKR 1.534 trillion. However, the actual number of tax rates prescribed in the Ordinance is more than double that, due to various sub-classifications within sections and different rates for active and non-active taxpayers. Remarkably, only 9 out of the 49 sections contribute around 66.5% of the total revenue collected, amounting to approximately PKR 1.02 trillion.
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To address these concerns, the OICCI has presented several recommendations:
01. Standardize the tax rate for services at 3% under Section 153, aligning it with the rate already applied to 29 service sectors. Currently, the high rate of 8% for service providers, classified as a minimum tax, significantly escalates the cost of doing business.
02. Categorize withholding tax rates based solely on active and non-active taxpayers, effectively reducing the number of existing rates by half.
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03. Simplify the overall structure of withholding taxes by harmonizing rates and establishing a single rate under each section where feasible. Currently, there are approximately 200 different tax rates for 24 withholding tax sections. For example, a single rate should be imposed for section 156 (Prizes and Winnings) at 15% and section 233 (Brokerage and Commission) at 8%, among others.
04. Minimize the number of miscellaneous withholding tax sections. Sections such as 236C/236K (purchase and sale of immovable property) and 154/154A (exporters of goods and services) can be merged to streamline the system.
05. Introduce an enabling provision in section 159 of the Ordinance, granting the Commissioner the authority to issue withholding tax exemption certificates to corporate taxpayers who fulfill their annual tax liability in advance. This measure aims to promote ease of doing business and provide relief to the business community.
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Additionally, the OICCI recommends two changes regarding exemption from withholding tax under Section 148 of the Income Tax Ordinance:
01. Grant exemption based on the discharge of advance tax liability, as outlined in section 147 of the ITO, 2001, similar to the provisions in section 153.
02. Extend the adjustability of advance tax under section 148(7), currently applicable to industrial undertakings, to the service sector as well. The suggested amendment proposes that “The tax required to be collected under this section shall be the minimum tax on the income of the importer arising from the imports, subject to subsection (1). This subsection shall not apply in the case of goods on which tax is required to be collected under this section for internal consumption in the business.”
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The OICCI believes that implementing these recommendations will simplify the withholding tax system, reduce complexities, and foster a more favorable environment for businesses and foreign investors in Pakistan. The proposed changes aim to promote efficiency, transparency, and ease of doing business while ensuring adequate tax collection.