The Federal Board of Revenue has detected flaws in deduction and collection of withholding tax from banks during monitoring of the banking sector in 2010-11. Sources told Business Recorder here on Tuesday that there are snags in current withholding tax regime for banks. On the other hand, tax experts argued that tax related issues have arisen due to the fact that there is a direct contradiction in the Income Tax Ordinance, Banking Companies Ordinance and Protection of Economic Reforms Act.
According to official sources, the analysis of banking sector revealed that the banks are not properly filing the complete and proper statements. Secondly, the vital/relevant information is not being enforced. Thirdly, the regulatory provisions (Rule 43) regarding payment of taxes withheld are not being monitored by the concerned authorities. Fourthly, there are physical limitations of withholding audit by the tax department.
Fifthly, the Regions get monthly collection and LTUs get quarterly statements, which are mutually irreconcilable. There are reconciliation problems in the said data of statements. The FBR further stated that the cases of non-withholding pointed out by SBP/Internal Audit are not shared with tax department for recovery purposes.
It has been further observed that the tax deducted is not deposited in time by the banks. The Board has also observed that banks are not filing statements under section 231A/231AA of the Income Tax Ordinance 2001. Presently, there is no withholding statements for sales tax (one percent) and FED (16 percent in the cases of advertising agencies/companies). The FBR has also witnessed decline in payments u/s 151 (i) (b), 231A and 231AA of the Income Tax Ordinance 2001during July-February 2010-11.
According to sources, there is a need for regular/round the year monitoring of banks. Besides, unified and transparent monitoring mechanism should be adopted by the tax department. The department should ensure enforcement of complete and proper statements by the banks. The monitoring units must have complete record of all withholding points in banks sector.
The FBR has further detected that there is no unified system of regular monitoring of banks. "No withholding audit of banks during July-February 2010-11," FBR said. However, monitoring of banks is confined only to the filing of statements by the banks whereas there is no cross matching of the FED/Sales tax and income tax data pertaining to banks.
The FBR further proposed that integrated monitoring of withholding/collection Income Tax/Sales Tax and FED is needed. The section wise break up on regional basis cross matching with payments mode may be incorporated in the prescribed statements to be filed by the banks.
There should be random checking/verification of withholding transactions and complete verification of timely payments of taxes withheld. The tax department should also ensure analysis of tax withholding and generation of discrepancy reports and there should be some effective reconciliation mechanism between Regional Tax Offices (RTOs) and Large Taxpayer Units (LTUs).
Under the strategy for withholding tax audit of banks, the FBR proposed constitution of working committee with members from each LTU and headed by Director General of Broadening the Tax Base (BTB). In depth analysis of current legal/procedural provisions and ground position of Bank''s withholding regime is also needed.