The two important components of art of taxation are convenience and economy. The Central Board of Revenue (CBR), for the last many years, has very intelligently shifted its prime responsibility of collecting Income Tax (Tax) to the persons making the payments.
This shift has achieved the economy and convenience for the CBR, thus fulfilling the requisite of good taxation system. But on the other end the person collecting or deducting tax is neither at convenience nor is having any economies. For him to do this thankless service on behalf of CBR requires extra efforts and resources.
The system of deducting the tax form payments or collecting the same along with other collection and thereafter paying it to the credit of Federal Government is commonly known as withholding tax regime. According to the last year figures of tax collection, the tax collecting and deposit under the withholding tax regime was more than the same collected directly by the huge establishment of tax collectors.
While the collection of Sales Tax and Excise (indirect taxes) are totally dependent on the person who makes supply or the same is charged at import stage, the collection of Income Tax (direct tax) is partly dependent on the tax deducted/collected at source and partly on the tax paid by the persons as advance tax or final tax along with the return.
The major portion of income tax as stated earlier comes from the tax deducted by the withholding tax agents. These withholding tax agents are performing the job and that too without any reward purported to be done by the CBR. To quote one example of Canada where a small percentage of total GST charged is left as record keeping expenses to the person filing the return.
Opposite to this what is the reward in Pakistan for collecting/deducting tax? Harassment and humiliation in different shapes and forms!
Furthermore withholding tax agents are required to keep records and file different returns quarterly and or annually. These old fashioned returns have unnecessary and sometimes irrelevant column. Apparently there seems to be no use at any end for the hard copies of these returns being filed under the present system.
For example the quarterly return of tax collected from telephone users run into hundreds of pages. It is beyond imagination as to what use somebody makes of the hard copies of these returns, especially in this era of technology where soft copies can be downloaded with convenience and for better use.
This paper is written to suggest some simplification in collecting, depositing, and filing procedures under the withholding tax regime. Before going into the details of the suggestions for simplification, I would like to draw your attention towards the relevant sections under which the tax has to be deducted/ collected with special attention to the confusing words used in these sections.
The use of simple and commonly understood language is the beauty of Law which is not found in these section. The sections 148 to 156 are given below with words in bold requiring emphasis:
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Section Nature of Payments
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148 Imports The Collector of customs shall collect advance tax
149 Salary Every employer paying salary to an employee shall, at the time of
payment deduct tax
150 Dividends Every resident company paying a dividend shall deduct tax
151 Profit on debt 1. Where
(a) a person pays yield on n account
(b) a banking company or financial institution pays
(c) the federal government, a provincial government or local
authority pays
d) a banking company, a financial institution, a company-----or a
finance society pays
152 Payments to non-residents Every person paying
153 Payments for goods and services Every prescribed person making a payment
prescribed person means
(a) the Federal Government
(b) a company other than a small company s defined in clause
(59A) of section
(c) an association of persons constituted by or under law
(d) a foreign contractor or consultant; or
(e) a consortium or joint venture
154 Exports Every authorised dealer in foreign exchange shall, at the time of
realisation of foreign exchange proceeds------deduct tax from the
proceeds
155 Income from property Subject to sub-section 2, every prescribed person making
payment --------
Prescribed person means the Federal Government, a
Provincial government, a company a non-profit organisations or
a diplomatic mission of foreign state.
156 Prizes and winnings Every person paying (prize on)
156-A Petroleum products Every person selling petrol products to a petrol pump
156-B Withdrawal of balance A pension fund manager making payment under pension fund
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In the above table it will be noticed that except for Section 148 which requires the collection of tax all other sections relate to deduction of tax. Contrarily to this in Chapter XII-The transitional Advance tax provisions, Section 233 requires the deduction of tax and all other sections relates to the collection of tax.
It is proposed that for removing this inconsistency and for symmetry and uniformity the two sections referred above may be shifted to their appropriate places ie section 148 may be put in place of section 233 and vice versa.
SECTION 153 & 155 In these two sections new term "prescribed person" has been defined and introduced, and in both these sections prescribed person is different. The reading of the definitions of prescribed person reveals that what is included in the definition of person under section 80, has been separately mentioned in prescribed person eg the definition of person includes a Federal Government, a Company or a Provincial Government which are separately mentioned under prescribed person.
As said earlier it is simplified and authenticated way to use the term which is already defined and than exclude or add what is not covered or required to be excluded, as compared to creating definitions under each section.
TRANSITIONAL ADVANCE TAX PROVISIONS Now let us take a look at the other section of the Ordinance ie Chapter XII which also deals with the collection/deduction of Tax and is titled as "Transitional Advance Tax Provisions". It is not exactly understood to date as why this is not a part of regular withholding tax regime.
There might be certain potent reasons in the minds of legislature, as amendments/additions and deletions are made at regular intervals in this section.
THE CHAPTER XII AS ITS STANDS IS AS FOLLOWS:
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CHAPTER XII
Transitional Advance Tax Provisions
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233 Brokerage and commission Where any payment on account brokerage or commission is made
by the Federal Government, a provincial Government, a local
authority, a company or an association of person--- ------
the principle shall deduct advance tax_____
233-A Collection of tax by a stock A stock exchange registered in Pakistan shall collect
exchange registered advance tax.......
in Pakistan
234 Transport business Any person at the time of collecting motor vehicle tax shall
also collect advance tax ----------
235 Electricity consumption (1) There shall be collected advance tax at the rates specified in
Part-IV of the First schedule on the amount of electricity bill of
commercial or industrial consumer.
(2) The person preparing electricity consumption bill shall charge
advance tax under sub-section (1) in the manner electricity
consumption charges are charged.
236 Telephone users (1) Advance Tax at the rates specified in Part-IV of the First
Schedule shall be collected on the amount of a) telephone bill of
a subscriber; and
b) prepaid cards for telephones
(2) The person preparing the telephone bill shall charge advance
tax under sub section (1), in the manner telephone charges
are charged.
3) The person issuing or selling prepaid cards for telephones shall
collect advance tax under sub-section (1) at the time of issuance
or sale of cards.
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The two suggestions for the simplification of the above table are follows:
SECTION 233 In this section there is again repetition as was stated earlier, the word person and Company defined in Section 80, includes Federal Government and Association of person and the Company includes Provincial Government, and local authority. A little re-phrasing and deletion of some words will make this section simpler.
SECTION 235 & 236 In subsection (2) of these sections the word charged is used which is in contradiction of the word collect. The rule is that the tax is charged, the duties are levied but the advance tax is collected.
The word charged is also inappropriate as in immediate preceding section ie 234 it is said that "the person collecting motor vehicle tax shall also collect advance tax", therefore in these sections also it is needed that the same language be used
SIMPLIFICATION OF DEPOSIT PROCEDURE Currently the income tax deducted or collected as the case may be has to be deposited to the credit of Federal Government on the individual challan basis. The following are the specific provisions in this regard.
DIVISION II- PAYMENT OF TAX DEDUCTED: relates to the tax deducted under section 149 ie imports. Under rule 42(1) the tax deducted have to be deposited on the same day and under rule 42(2) within 15 days from the end of the month to the credit of Federal Government.
Additionally under rule 50(3) the tax deducted have to be deposited on the same day, and under rule 50(4) within one week from the date amount was collected or deducted.
The above two requirements of depositing the tax collected/deducted are cause of great concern and are a test of nerve of the withholding tax agents. The collecting/deducting agents have to make minimum of four trips in a month to the banks for deposit of Tax.
They have to stand in line and carry cash (in most of the cases as some banks & treasury office do not accept checks). If the tax is deposited by cheque another trip to banks have to be made to collect the challan after three days required for clearing.
The tax challan is also designed as to provide for space for only 13 names. This way, many challan have to be filled, and filed each month. At the end of the periods there is a large number of tax challan, the copies of which are to be kept and distributed to those on whose behalf the Tax is deposited.
Over and above the person who has collected or deducted tax, not only has to provide the copies of challan to the persons from whom the tax was collected/deducted. He also has to provide a certificate at the end of the year. In most of the cases the person also has to verify challan on the direction of the departments at any stage and after any years.
Similarly at the time of claiming of refunds or filing of returns these challan are required. The authorities get them verified and authenticated from the Branches of banks/treasury where the amount was deposited. This whole procedure is a continuous irritant to all the three parties to the transaction ie the CBR the taxpayer and the tax collector.
In order to simplify matters with regards to deposit of tax collected/deposited the following procedure is suggested which will simplify and streamline the whole procedure of tax collection and deduction.
(To be concluded)
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