Effective monitoring of withholding tax: FBR to focus non-resident companies, cross-border deals

The Federal Board of Revenue has decided to focus on non-resident companies and cross border transactions which falls within the ambit of withholding tax (WHT) under the new strategy for effective monitoring of WHT. The FBR's quarterly review issued here on Thursday stated that under the present scheme of things, most of the dealings with non-resident companies and cross border transactions fall in the ambit of withholding tax.
Income Tax provides adequate mechanism for such dealings, as contained in various provisions of the income Tax Ordinance, 2001 regarding the legal basis of taxation, determination and payment of taxes, refunds and solution of tax disputes. While the taxation of non-resident entities and cross border transactions are certainly based on certain economic policy goals, yet a need is felt to review the inadequacies in the system, more so, in withholding taxes on account of their substantive contribution, outreach and heavy reliance on them, both in the national as well as the international context, FBR added.
The FBR has proposed a new strategy for effective monitoring of withholding taxes (WHT) including registration of companies already existing on 'NTN Master Index' and registration of units with the help of third party information. The FBR's report highlighted proposed monitoring strategy for withholding taxes. It included registration of companies already existing on Master Index, tax challans of WHT deposited by persons not existing on Master Index; tax challans deposited by exempt entities and registration of WHT through the third party information.
The FBR proposed that the monitoring work needs to be streamlined; enforcement of all WHT statements across-the-board - all non filers should be compelled to file their statement on time; desk-audit to be carried out of every filed statement and audit with the help of IT for pointing out correct withholding and delayed deposit.
The FBR said that there are various issues involved in the monitoring of withholding taxes. Broadly speaking there are two types of gaps to be filled in Monitoring of Withholding Taxes: Firstly, there is a need for a mechanism to detect current Financial Year's defaults in tax deduction/collection of withholding taxes and deposit thereof in the Government Treasury/NBP/SBP. For deduction/collection & deposit of WHT, the FBR should focus on non-deduction / collection of tax; short-deduction/collection of tax; short deposit of tax; delayed deposit of tax and tax deducted/ collected but not deposited.
The FBR said that it is generally felt that there is a need to divert more resources and concentrate more on the monitoring of withholding taxes, as these taxes have the potential to offset any possible dip in revenue for any reason. In case of contraction of the economy in the midterm and on account of adverse impact of international economic scenario, which is beyond the control of GOP, much fiscal space can be provided by withholding taxes.
Following grounds realities and system deficiencies also support the requirement of serious administrative review of the present withholding regime: Firstly, the taxpayers as well as withholding Agents are not fully meeting their withholding obligations. Given the existing low compliance level in the country at large, there is a dire need to improve voluntary compliance of tax laws.
Secondly, the glaring instances of violation of withholding provisions by the Taxpayer/Withholding Agents have been noted time and again. Their repetition needs to be stopped. Thirdly, there are ample instances where tax deducted by withholding agents is not timely deposited in Government treasury but the defaulters go unpunished. Such trends are to be discouraged.
Fourthly, desk-bound audit, presently in vogue, is not a "real time" check on the business transactions/evasion and timely deposit of the tax deducted by the withholding agents. An effective system of withholding Audit is required. Fifthly, the field formations of the Department and the taxpayers suffer from major capacity constraints, regarding their obligations. Hence, there is a need for capacity building of the both.
Sixthly, after universal self assessment scheme (USAS), emphasis is to be laid on Withholding Taxes & Tax payers Audit. Monitoring and Audit parameters are therefore required to be prescribed and their observance by both is to be ensured. The tax collectors are expected to make the process of monitoring and Audit more transparent and less discretionary.
Seventh, the reform process initiated by the Government provides an opportunity to the Department to visualize the Short Term and Long Term strategy for more effective monitoring of withholding taxes. Timely re-engineering and re-designing of withholding process is necessary as they form a significant part of overall system. Eighth, defining the parameters for monitoring and audit of withholding taxes have become all the more important considering the policy thrust of the Government on increased facilitation and better education of the taxpayers to promote voluntary compliance of the tax policy of the government. Withholding regime provides ample opportunity to implement such policy on account of their involvement in ordinary business activity of tax payers.
Ninth, the withholding regime is inflationary and is adversely affecting poor the most, thus defeating the equity principle. The regime thus needs to be rationalised. A study is needed for the same to gauge the real impact and to devise ways and means to market it equitably, FBR added.
The sectoral contribution to tax vis-à-vis the economy does not commensurate with each other. A comprehensive Gap Analysis is required at FBR level in collaboration with renowned institutions/individuals. Withholding regime can provide the basis for such analysis, the FBR said.
The FBR said that due to trade compulsions, progress in financial liberalisation and internationalisation, is inevitable to timely take the necessary measures in various fields of national and international taxation. Tax treaties between the countries also come into play. Major areas requiring reforms include the Taxes on the capital, interest, dividends, and royalties, capital gains from stock transfers, securities transactions and dealings with the non-residents.
The FBR said that the reforms strategy has special focus on use of I.T, improvement in delivery of service to the taxpayers and efficient processing of the information. There is a need to avail the huge opportunities provided by revolution in the information and communication technology for making the system more co-ordinated and integrated. For this purpose, most of the business processes still need to be automated and computerised for ultimate integration of the system operating under the Income Tax and the sales Tax Regimes. In this regard, the integrated approach adopted by the other developed tax systems of the world needs to be studied and followed after necessary customisation as per national needs. For this purpose, there is a need for re-orientation of both the departments on account of assignment of responsibility on functional lines. The present processes, despite being different, are complementary and heavily dependent on the inputs from each other for being more effective and futuristic.
The present process of developing the common business processes after their necessary re-engineering, needs to be supplemented with an effective and forceful strategy and operational planning. The major problems which are likely to be confronted by the Board in the near future, in addition to the mind set problems of both the Services regarding reaction to the changes, would be the strategic planning process, the dedication of resources for integrated automation and computerisation of the systems, regional level co-ordination, the cross tax training process, utilisation of available resources, removal of the snags in the integrated systems and much higher level of commitment at all levels towards the reforms goals in important fields like withholding taxes. This requires special efforts, FBR added.
The FBR said that the withholding taxes are the backbone of direct tax revenues. While the taxpayer, on whose behalf adjustable withholding taxes are collected by a Withholding Agent, is interested in timely deposit of such taxes in the treasury, it may not be so in case of presumptive taxes. In any case, FBR expects that wherever due, the Withholding Agent collect/withhold such taxes at the prescribed rates and deposits in the treasury well within the prescribed time. Hence, there is a need to ensure that there is in place the right environment / mechanism for identification and data base of the Withholding Agents: their awareness of the withholding obligations, system audit of taxes collected under withholding regime and the subsequent field audit on a selective basis, to cover the gaps, particularly where deficiencies are observed and non-compliance is reported. Besides, it is also necessary that the department extends full services and facilitates to the Agents in meeting their obligations conveniently so as to promote voluntary compliance in tax laws, without there being any need to invariable resort to enforcement provisions.
The FBR said that the monitoring of withholding taxes is a complicated and time-consuming process, involving both the taxpaying community and non-taxpaying withholding agent on one hand and the department on the other. Considering their revenue potential, hassle for the taxpayers in meeting obligations and various problems faced by the Department, it is imperative to the purpose to not only highlight the issues involved but also to offer a solution to the issues. Related actors needs to be identified and plan prepared for effective enforcement.
Despite huge potential substantial audit activities have not been undertaken in the field of Withholding taxes. The present state of affairs warrants an impartial and patient review of the present withholding tax regime in the country. The purpose is to make the tax system consistent with the universal principles of taxation and to put the same in step with the current trends in taxation and smooth implementation thereof. The ultimate goal is adequate operating revenue for meeting expenditure requirements of the government, on basis of a rational Withholding Tax Regime providing stable and conductive environment for the private sector to thrive in the age of high international competition and extension of better services to the taxpayers to help meet tax obligations, the FBR research added.