WHT system discourages manufacturing sector: PBC

KARACHI: Withholding tax system is promoting trading culture, destroying manufacturing sector and exerting pressure on external account position, a business advocacy group said.

Pakistan Business Council (PBC) said presumptive tax regime (PTR) where taxes are withheld at the source on the sale of goods, contract execution and import causes huge outflows of foreign exchange in addition to hurt the balance of payments position. PBC recommended the Prime Minister to replace the presumptive tax regime for commercial importers with advance tax and adjustable tax in order to bring them into tax net.

Tax experts also termed the presumptive tax regime as blight of the taxation system. The concept of presumptive income was first introduced in Pakistan in 1980 to facilitate taxation on foreign shipping and air transportation. It was also aimed to remove competitive disadvantage for Pakistani exporters in the region. However, the regime was extended to other sectors.

A tax expert said value of imports and exports and payment for a contract execution and supply of goods are assumed as the income of taxpayer under the presumptive tax regime. Subsequently, the income is taxed at the prescribed rate through withholding tax rates that are lower than the normal rates.

At present, taxation on presumptive income basis covers dividend, interest on bonds, certificates, debentures, securities or instruments, interest on bank deposits, prize money on bonds and winning amount of raffle, lottery and crossword puzzles received by both resident and nonresident taxpayers.

Taxes on such heads are considered as the final discharge of tax liability and no allowances or deductions are permitted against the income.

Another tax expert said the regime results in eliminating the concept of maintaining the full sets of books of accounts due to taxation of gross receipts on presumptive basis.

“It (PTR) has become an easy tool for the Federal Board of Revenue to collect tax through withholding agents,” the expert said.

Withholding taxes represent around 70 percent of the direct tax collection.

There are more than 74 types of withholding tax provisions in income tax, which makes it difficult for organised industrial sector to continue operation.

Sales tax, which is theoretically value-added, has massively been distorted through policies. Sales tax system has become further complex with the presence of sales tax withholding special rules, sales tax special regime, further tax and extra tax.

Tax Reform Commission (TRC), in its report submitted to finance ministry in May 2015, recommended phasing out of the final tax regime within five years. The commission said final taxation should be eliminated on income of the commercial importers and commission agents. Their Income should be subject to taxation on net income basis, it added. TRC further advised that income of exporters and from supply of goods and service should be subject to taxation on net income basis.