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budget proposals

Revamping withholding tax regime with maximum five rates recommended

KARACHI: Federal Board of Revenue (FBR) has been urged to revamp withholding tax regime and bring down the existing 50 different tax rates to maximum five rates.

Overseas Investors Chamber of Commerce and Industry (OICCI), the representative body of foreign investors operating in Pakistan and multinational companies, in its proposals for budget 2021/2022 suggested the FBR to revamp the withholding tax regime, which is one of the key irritants for compliant taxpayers.

It said that the fact that the ‘Collection and Deduction of Income Tax at Source (Withholding Agents Perspective) (Taxpayer’s Facilitation Guide)’ on the FBR website is of 48 pages highlights the complexity of the withholding tax regime which has more than 30 tax provisions that need to be followed and 50 different tax rates, applicable on nearly all heads of receipts/payments.

The rate of withholding/advance tax also varies depending upon the nature of transaction, legal/tax status of the parties i.e., company or individual and active or in-active filer.

Moreover, FBR system does not auto populate taxes withheld in the portal to the credit of the beneficiary.

Furthermore, different categories of withholding tax (WHT) rates have been prescribed under the ITO 2001, for various types of payments and it has become extremely difficult for the person processing payments to be precise and accurate in applying WHT rates and ensure compliance:

The complexity for the withholding agent has been further compounded after the introduction of active taxpayers list and different rates for an active and non-active filer.

The OICCI recommended the following:

i. Withholding tax regime should be revamped by reducing it to a maximum of five rates for all withholding taxes and the differentiation should be on the basis of active and inactive taxpayers only.

ii. All taxes withheld should be auto populated in the portal to the credit of the beneficiary.

iii. Final Taxation Regime should be eliminated, and all withholding taxes should be available for adjustment and the operations wing of FBR should ensure that all persons whose taxes have been deducted file their tax returns.

iv. Withholding agents should be given incentive in the form of 2% tax credit of the amount collected for facilitating the Government.

v. In addition to the above administrative/streamlining issues, withholding/ advance tax rates on below transactions should be reconsidered.

a) Withholding tax rate be reduced to 0.25% for all distributors in line with the withholding taxes applicable on dealers and sub-dealers of fast-moving consumer goods.

b) Withholding tax rates applicable on services is 8 percent minimum tax regardless of the actual taxable income of the service provider. The nature of this tax effectively becomes indirect tax and increases the cost of doing business for service providers, hence, tax on services should be made adjustable.

vi. Withholding tax deduction u/s 153 (1)(a) which is currently considered as minimum tax for all the suppliers (except manufacturers and listed companies) should be made adjustable at least for corporates appearing in active taxpayers’ list.