Withholding tax

Pakistan has failed to collect direct income tax – this admission comes every year through the various proposals approved to collect tax. The Pakistan government has accepted the FBR’s proposal to increase the withholding tax rate from 0.5 percent to 0.6 percent on cash withdrawals over Rs50,000 by non-tax filers. The WHT rate on cash withdrawals for taxpayers will remain at 0.3 percent. Similarly, the government has decided to increase the withholding tax on dividends, interest and shares. The decision to impose a withholding tax on cash withdrawals from banks has already been a controversial one, especially for salary earners. Those who are paid fixed salaries are already subjected to withholding income tax on their salary before it is transferred to their bank account. The same individual is then taxed again when they wish to actually use the money they have already paid tax on. While it is fair to differentiate between tax filers and non-filers, the government’s attempts at raising revenue in an indirect manner raise questions over the actual effectiveness of the FBR as a body. Moreover, like the general sales tax, the policy raises concerns over the fairness of taxation practices in the country, with the FBR yet to have found an effective mechanism to tax the richest among us.
The fact that Pakistan shares the honour of a WHT on cash withdrawals with crisis-hit Greece shows the instability of the fiscal system, which Finance Minister Ishaq Dar continues to claim has improved. If the measure is merely a mechanism to punish people for not filing taxes, then why are tax filers still being charged 0.3 percent per cash withdrawal? If the government’s claims are true that the same account can be claimed as a tax refund by taxpayers, then why collect it in the first place? Since the tax was introduced in 2012-13, the FBR has collected Rs12.5 billion and Rs19 billion. The target for next year will be around Rs25 billion. Even though this is a minor part of the Rs3,000 billion tax collection target, it double taxes taxpayers needlessly and shows the failure of the government to tax the income of non-filers. This measure is in addition to other tax measures such as imposing a new tax on ‘rich people’s’ electricity bills and increasing the withholding tax on first and business class flights. The idea of the tax is to allow the FBR to tax the income of those living lives of luxury without needing to audit their assets and income. Only around 840,000 people in the country are tax filers. More than these half-measures, it is the decision to declare one’s CNIC as the National Tax Number next year that could cause the greatest impact in terms of increasing the FBR’s capacity to tax. Unfortunately, the FBR’s reliance on withholding taxes shows it is not confident in its ability to do so.