Short deduction of Rs 3.562 billion in 'salaries': massive leakage in banks' WHT regime unearthed

Regional Tax Office (RTO) Rawalpindi has unearthed a massive leakage in banks' withholding tax regime by conducting forensic analysis with short deduction of Rs 3.562 billion under the head of 'salaries' during July 2014 to May 2015 period. The FBR has received a comprehensive report of the RTO Rawalpindi Wednesday. The said RTO has carried out the detailed analysis of the banks' withholding tax regime and also made viable recommendations/corrective measures for consideration of the Board.
According to the recommendations/corrective measures of the RTO, the state of affairs calls immediate corrective measures. It is recommended that the credit for deduction/collection u/s 149 for bank employees' may be decentralised. Based on individual NTNs (or place of posting where no NTNs are ascertainable) payments/collections reported by the banks through their withholding statements may be transferred to the concerned RTOs. DPCs concerned can act as "Clearing Houses" in this regard. Secondly, IT access to withholding statements, filed by all banks, corporate giants with multi-city branches may be allowed to all RTOs, so as to enable them in monitoring of proper & timely deduction/collection of taxes under various withholding provisions. This way each field formation can be obligated to safeguard withholding operations within its specific jurisdiction. This step would also help in timely enforcement of filing of returns by the bank employees.
Thirdly, as action u/s 161/205 cannot be diluted to the level of each and every field formation, therefore in order to avoid this possible hardship to defaulting Banks and corporate giants, it is recommended that all leakages detected & reported by RTOs may be routed to DG (WHT)/Chief (WHT) FBR. The said office(s) after ensuring timely remedial/recovery measures can apportion the credit of collection between detecting RTO and enforcement formation on the basis of qualitative input made by the respective formations.
Fourthly, similar audits may be conducted by respective RTOs/LTUs in the cases of all corporate giants with multiple intra-city and multi-city branches. An immediate action by the Board (Para-4 above) would plug the existing loopholes in tax withholding regime, entail a multilayered monitoring mechanism, incentivise good performance, discourage complacency and ultimately and give a boost to national revenues. As all the remedial measures, as suggested above are home based, do not involve any financial cost and are hassle free, as far as WHT Agents are concerned, therefore warrant immediate enforcement, the report said.
The RTO Rawalpindi further highlighted that while conducting its routine field operations, unit officer MAC-IV, Withholding Zone RTO RWP has observed that tax withholding regime of Pakistan's banking sector is badly infested with leakages and needs a serious review. Findings of the forensic analysis of only one withholding area, ie, salaries, conducted thus far, are an eye opener. Short deduction during July 2014 to May 2015 alone stands at Rs 3.562 billion.
The further break-up of aforesaid short deduction revealed that the short deduction worked out for the months of July, August and September, 2014, indicating revenue loss of Rs 140.513 (millions) has already been communicated to the LTUs/RTOs holding jurisdiction over the cases. The remaining Short deduction worked out for the months of October, 2014 to May 2015 of Rs 3,421.487 (millions) is being forwarded to the Board(soft copy) for information and further directions to the concerned LTUs/RTOs for retrieval.
The methodology for detection revealed that the figure of aforesaid short deduction has been simply worked out by downloading withholding statements filed by the target taxpayers. Adopting the taxable amount as per declared version, based on respective withholding statements and applying rate of tax as per applicable rate of the tax year.
The basic working has been made by the concerned unit in charge and random rechecking has been conducted by concerned ADCIR and CIR (WHT). The RTO Rawalpindi has also tried to find out the breeding factors contributing towards this adverse phenomenon in the bank's withholding regime, which is one of the most documented & organised sectors of our economy. Following major areas have been identified in this regard.
In the cases of salaried individuals, apart from deduction u/s 149, a lot more withholding provisions are applicable. Under the prevailing law settlement of all adjustable tax withholding is allowed only at the time of filing of returns. While making payments/releasing salaries WHT Agent has nowhere been allowed to account for all such claims filed by the employees. WHT Agent is neither legally empowered nor qualified to adjudicate the admissibility of each such claim filed by the employees, prior to the filing of their tax returns. Banks have apparently assumed the role of tax authorities by allowing pre-filing adjustments. As this practice suits all and sundry, (especially the top management with hefty salaries) therefore its widespread popularity is evident from massive dip in withholding u/s 149. This phenomenon has now engulfed almost all major WHT Agents, it said.
Among the WHAs u/s 149 the bank management is perhaps the only withholding agent which is empowered for deduction/collection of tax in their own case ie two-in-one position. In all other cases invariably the WHAs and Withholdees are distinct and separate entities, therefore the version of deduction /collection at source remains mostly objective & fair. In the banking sector this unique position of WHAs is a potential threat and risk to the interest of revenue.
Credit for collection u/s 149, made by the banks and other corporate giants is centralised with selected LTUs/RTOs, holding assessment jurisdictions over said institutions. This decision has created multiple revenue risks like; Banks, operating at hundreds of stations with thousands of branches all over Pakistan are transmitting huge amounts under different heads to 3/4 LTUs/RTOs. Any ground check/verification by Lahore/Karachi/Islamabad based LTUs is physically out of question. Knowing this limitation, banks, especially the private/privatised banks have space for manoeuvring.
While deduction/collection is centralised, Tax returns of banks and their employees are filed at different, multiple and mutually de-linked jurisdictions. Over & above Iris does not allow accessing any withholding statement beyond respective jurisdiction. The instant exercise is confined to the previous financial year only because now Iris prohibits any such pro revenue venture. All this is a perfect recipe for revenue disaster.
While 3/4 LTUs/RTOs, receiving almost a wind fall, have gone complacent, all other 17/18 field formations are rather obligated to issue refunds wherever so warranted, thus there is no incentive for vigilant monitoring. Apathy is all pervasive. Over the years major banks have a big say in achievement of revenue targets, as a result withholding audit of banks has almost withered away, the report of RTO Rawalpindi added.