FBR advised to shed reliance on withholding tax

KARACHI: The State Bank of Pakistan (SBP) on Thursday advised the Federal Board of Revenue (FBR) to shed its reliance on regressive withholding tax and rather take steps to encourage registration with the tax authority. 

The SBP, in its report on the state of Pakistan’s economy released on Thursday, said two-third of the total direct taxes collected in the first half of the current fiscal year came from withholding taxes – most of which are applied on economic transactions.

“This introduces an element of regressivity in the direct tax system, which should be reduced by making more efforts on the part of tax authority and increasing documentation of the economy,” it added.

The FBR collected Rs540.8 billion through direct taxes during the first half of 2015/16 (FY16), which was Rs82 billion higher than the revenue collected during the same half last fiscal.

Most of this collection came from withholding taxes (i.e. Rs 376.8 billion), while voluntary payments and collection on demand contributed Rs161.5 billion and Rs24.1 billion, respectively.

The government slapped 0.4 percent withholding tax on non-cash banking transactions by non-filers of tax returns.

“The impact of this particular tax, in terms of financial exclusion and growth of informal sector, cannot be ruled out. The increase in the informal economy, in turn, has negative implications for tax collection in the long run,” the State Bank of Pakistan said.

The report further said indirect taxes collection grew 18.4 percent to Rs844.1 billion in July-December FY16. Around 70 percent of these were generated through sales tax. Within sales tax receipts, Rs216.3 billion came from petroleum products, it said.

Collection via customs duty jumped more than 30 percent in the first half on the back of additional duties introduced recently.

“If FBR tax collection shows a growth rate higher than the nominal GDP growth during FY16, then tax-to-GDP ratio will be higher than last year i.e. 8.5 percent,” the report said. Currently, tax to GDP ratio hovers around 9.0 percent.

“This can happen if the Federal Board of Revenue maintains its current (revenue) growth rate of 18.2 percent for the whole year and nominal GDP growth rate does not exceed 12 percent, as projected in the annual plan FY16,” the report added.

The federal government announced new tax measures, including additional customs and regulatory duties on certain items, as well as an increase in federal excise duty on cigarettes, to make up for the low revenue collection during the first quarter of the current fiscal year.