Farm sector: WHT on government purchases may be major source to generate revenue

A major revenue generation measure could include levying withholding tax on all kinds of procurement made by the government from the farm sector. Analysts told Business Recorder here on Friday that withholding tax is a major source of revenue generation on the direct tax side. Total share of withholding tax in gross collection rose to 66 percent in the first quarter of 2010-11 from 65 percent in the first quarter of 2009-10.
The government is the single largest procurer of farm outputs. Therefore, imposition of withholding tax would not only generate revenue but would also help in documentation of the untaxed sectors. When the withholding tax is withheld the payee would be in a position to obtain adjustment, and liable to file his/her due income tax return. The information pertaining to the withholding tax deduction on the purchase of farm outputs would help in determining the actual turnover and sales of farm sector.
The government last year purchased about 7.5 million tons of wheat at Rs 950 per kg. Wheat is the only farm product for which the government fixes the 'support' price, while it announces 'intervention' prices for other major crops, like cotton, sugarcane, paddy and maize.
According to sources, the farm sector is contributing nothing to the national exchequer, as far as federal taxes are concerned. The documentation of potential persons, engaged in agri trading and farming, is possible through imposition of withholding tax on procurement made by the government from the farm sector. The FBR has proposed to impose 'reformed general sales tax' (RGST) on agri trading, but it is yet to be implemented.
Analysts said that at present withholding tax is applicable on contracts executed, supply of goods and services to the federal government under section 153 of the Income Tax Ordinance 2001. Under section 153(1)(a) of the Ordinance 2001, payment for goods and services (supply) are subjected to withholding tax at the rate of 1.5 percent and 3.5 percent respectively. This source of withholding tax has huge potential, but the figures of actual collection of tax and due on the development expenditure of the government and deductions made by private sector need reconciliation. Therefore, a macro analysis of activities and monitoring of all withholding agents is necessary. The FBR has to examine the deduction for contracts executed, supplies made and services rendered. The Board could examine the total payments on account of purchases, services, expenses and amount of total deductions during the relevant period.
Similarly, a comprehensive analysis of government development projects should be conducted. All major organisations in public sector need to file annual contract awards and withholding reports, stating the tax deducted from payments to prime contractors of public funded projects. Besides, the contracts are sub-let very frequently in Pakistan, but deduction is restricted to the prescribed persons only. In the cases of sub-letting of contracts, the terms and condition and mechanism of tax deduction from the payments to sub-contractor should be examined, tax experts said.
Sources said that the board had declared government departments/autonomous bodies as withholding agents for deducting 3 percent of the total 17 percent payable sales tax involved in transaction of supplies made to these departments. It is primarily an enforcement measure for compliance by both the withholding agents and the suppliers to the government departments.
However, it has been observed that some government departments do not provide details about persons from whom they have withheld sales tax under the Sales Tax Special Procedure (Withholding) Rules, 2007. Resultantly, the FBR could not maintain the data of suppliers, etc, of government departments, which is necessary for obtaining accurate information about the business transactions made by them. In this case, some departments are not providing information of their suppliers from whom sales tax has been withheld on supplies made to the autonomous organisations and government departments/organisations, tax experts added.