Car purchase: FBR mulling over new rule for withholding tax collection

The Federal Board of Revenue is examining a proposal to amend Income Tax Ordinance 2001 for collection of withholding tax on the purchase of cars at the time of registration by the provincial motor registration authorities.
Sources told Business Recorder on Thursday that the board is likely to change procedure for collection of withholding tax on the purchase of locally manufactured cars. In this connection, an amendment would be made in the income tax law in the next budget.
Presently, authorised dealers/manufacturers of cars are collecting withholding tax at source. The proposal is to collect the levy through motor registration authorities keeping in view the concern of the local automobile industry.
Recently, FBR Chairman discussed the withholding tax collection under section 231B of the Income Tax Ordinance 2001 with the FBR Direct Taxes Wing. The FBR chairman said that the car manufacturers have complained that due to withholding, the sale of cars has come down which should not have happened. Accordingly, the FBR should look into possibilities of collecting such withholding tax through motor registration authorities and proposals would be incorporated in the upcoming budget.
Sources said that the FBR has instructed the Director General, Regional Tax Office (RTO), Karachi to submit proposals for changing procedure regarding withholding tax under section 231B on sale of cars.
In order to extend the tax base by forcing potential taxpayers to file returns of income and bring local purchasers of cars at par with importers, an adjustable withholding tax @ 2.5 percent was levied on purchase of new cars in budget 2007-2008. The tax shall be collected by the manufacturers or their authorised dealers as the case may be. At the end of the first quarter (July-September) 2007-2008, an amount of Rs 61.2 million has been collected from this levy, which again is on the lower side against the budget estimates.
A new section 231B was inserted in Ordinance 2001 in the last budget, envisaging that every car manufacturer or its authorised dealer is obliged to collect advance tax @ 2.5 percent (as amended by clause 9A of Part II) of the value of car after August 31, 2007 at the time of sale, irrespective of the date of booking or advance payment made by the purchaser. The tax so collected is adjustable and the taxpayers are entitled to claim credit of the same while filing return of income for the relevant tax year, the FBR added.