ISLAMABAD: The government has pledged to do away with as many as 10 to 15 withholding taxes in the budget 2021-22, scheduled to be presented to the parliament in the first week of June.
Collection of withholding taxes levied mainly in the sales tax mode and incorrectly credited under direct tax collections (accounting for more than 72 percent of total direct tax collections) is not only highly inflationary but its incidence on the poor is higher relative to the rich.
Sources informed Business Recorder that the withdrawal of 10 to 15 withholding taxes was not likely to have a major impact on their overall contribution to direct tax collections as their revenue contribution would be retained in the coming budget however the withholding tax regime would be reformed.
The government has committed to abolishing 40 withholding taxes in the next two fiscal years in order to reduce their number from existing 65 to 25. The implementation of the plan would begin from the upcoming budget for fiscal year 2021-22.
There were 15 meaningful withholding taxes – which contributed to direct taxes, sources said, adding that 10 major withholding taxes that contributed around 84 percent to the total withholding tax collection in 2019-20 were: contracts, imports, salary, telephone, dividends, bank interest, cash withdrawal from banks, electricity and exports.
The highest contributor to withholding taxes was contracts with 21.8 percent share, followed by imports (18.3 percent) and salary (11.9 percent); further break-up revealed that the share of only three heads of WHT i.e. contract, imports, and salary came to around 50 percent indicating heavy reliance on a few heads.
Sources further noted that withholding taxes would be abolished without compromising the objective of documentation.
The Federal Board of Revenue (FBR) will propose abolition of withholding taxes in a phase-wise manner, but will continue to rely on the withholding tax regime due to the narrow tax base, distorted tax system and relative ease in collecting withholding taxes, they added.
The FBR abolished the following nine withholding taxes in budget (2020-2021): collection of advance tax on education-related expenses remitted abroad; tax on steel melters and composite units; withdrawal of balance under pension fund; tax on local purchase of cooking oil or vegetable ghee by certain persons; advance tax on functions and gatherings; advance tax on cable operators and other electronic media; advance tax on dealers, commission agents and aarhtis etc.; advance tax on insurance premium and advance tax on tobacco.
Copyright Business Recorder, 2021