Karachi, July 14, 2024 – The Federal Tax Ombudsman (FTO) has uncovered a significant problem with the withholding tax system for leased vehicles in Pakistan. This issue can lead to double taxation and denial of rightful tax credit for individuals and businesses leasing cars.
The Problem: Wrongful Credit and Double Tax
The crux of the issue lies in the way withholding tax, a form of advance tax, is applied to car purchases through banks or leasing companies. While the tax is deducted at the source (the car manufacturer) and deposited with the government, the credit for this tax is mistakenly given to the leasing company, not the actual lessee (the person leasing the car).
This creates a double whammy for the lessee:
• Denied Credit: They don’t receive the tax credit they’re entitled to against their annual tax liability.
• Double Taxation: When the lease ends and they go to register the car, the registration authority may charge them the withholding tax again, as they don’t recognize the initial payment made through the leasing company.
The FTO’s Investigation and Findings
The FTO launched an investigation based on observations of discrepancies in tax credit records. They found that car manufacturers were depositing the withholding tax in the name of the leasing company, even though the lessee ultimately bears the financial burden. This practice, according to the FTO, constitutes “maladministration” by the Federal Board of Revenue (FBR), the national tax agency.
FTO Recommendations for FBR
To address this issue, the FTO has recommended a two-pronged approach for the FBR:
1. Credit to the Lessee: Establish a mechanism to ensure the withholding tax credit goes to the lessee’s account. This can involve requiring manufacturers to record and report lessee details along with tax payments. Additionally, car manufacturers should be mandated to provide a certificate to the lessee documenting the tax paid in their name. This certificate would be accepted by the registration authority as proof of payment, preventing double taxation.
2. Digital Integration: Implement a digital system that integrates data from car manufacturers, leasing companies, and registration authorities. This system would verify the withholding tax payment and ensure it’s credited to the correct lessee.
Impact and Future Steps
The FTO’s findings and recommendations aim to streamline the tax system for leased vehicles, ensuring fairness and preventing financial burden for lessees. The FBR’s response to these recommendations will be crucial in determining the effectiveness of the proposed solutions.
This situation also highlights the importance of clear communication and coordination between different entities involved in the car purchase and registration process.