The major contributors to withholding tax were contracts, supplies, imports, salaries, telephone, securities, exports, electricity and cash withdrawals from banks during July-December 2007-08.
According to an FBR report, withholding tax of Rs 92.3 billion was collected during July-December 2007-08, against Rs 77 billion in the corresponding period of last fiscal year, entailing a significant growth of 19.9 percent.
The major heads contributed nearly 88 percent of total withholding tax (WHT) collection. The WHT from contracts and supplies holds an all important position with slightly over one-third collection of WHT. It is followed by trade-related deductions 20.7percent [imports 13.9 percent and exports 6.8 percent], salaries 9.4 percent and securities and bank interest 8.6 percent, etc.
A healthy performance in receipts on account of contracts, telephone use, salary payments, securities and bank interest and electricity bills was witnessed during first half of 2007-08.
Notwithstanding the double-digit growth in contracts and salary, these two heads require further scrutiny, given the size of Public Sector Development Programme (PSDP) spending on infrastructure development and the general improvement in remuneration received by employees of public and private sector organisations.
On the other hand, there has been a decline in WHT on imports and exports, which appeared to be inconsistent with 14.1 percent and 3.8 percent growth in imports and exports, respectively, during the first half of 2007-08. The reduction in WHT rates on imports and exports could be one of the reasons for this outcome. However, this area requires further probing due to diverse nature of tradable commodities and categorisation of taxpayers into manufacturers, commercial importers and exporters. Finally, 15 percent increase in deductions on cash withdrawal vindicates the assertion that the undocumented economy requires special tax treatment.
The share of WHT in gross income tax collection, that had declined during last few years, now increased to 54 percent against 40.6 percent in first half of 2006-07 mainly due to substantial decline in voluntary payments and improved performance of WHT, thereby putting further question mark on the extent of tax effort by the department.
The report said that the WHT on imports had reduced to 5 percent, for specific categories of imports it varies between 1 percent and 2 percent. The rate of deduction on contracts and supplies ranges between 2 percent and 6 percent; for exports between 1 percent and 5 percent; and cash withdrawal 0.2 percent.
On salaries, electricity consumption, and telephone bills, WHT is deducted as per slab rates. The significance of the WHT regime within income and corporate tax has been an established fact. However, the rationale for having so many WHT heads and the presumptive nature of many of them remains a debatable issue.
With the introduction of the Universal Self Assessment Scheme (USAS) and gradual improvement in voluntary compliance, the share of WHT in total collection had kept on declining over the last few years. Thus, there was a lukewarm interest in how revenue was trickling from these WHT sources. However, with a sudden decline in payments with returns and also advance taxes, there has been a realisation that this source of revenue requires much more attention than it received in the past, the report said.