Although, the PML (N) government has had a Presidential Ordinance issued to cut the rate of withholding tax from 0.6 percent to 0.3 percent as a result of its talks with representatives of traders, the business community is, however, still worked up.
Demanding its immediate withdrawal. Business leaders have threatened to launch a countrywide protest. The government, however, appears to be in no mood to succumb to pressure, though it looks weary and visibly disturbed about strike calls against this new resource mobilisation move.
The 0.6 percent withholding tax was imposed in the FY16 budget to collect an additional Rs 35 billion on all bank transactions over rupees 50,000 in a single day by non-filers.
It has been halved for a period of three months. The objective is to lure the business community and others into filing their tax returns, majority of whom otherwise fears that this exercise will land them in trouble.
The finance minister, Ishaq Dar, maintains that the new withholding tax regime is aimed at discouraging non-filers and that filers of the tax returns need not be worried about anything.
Dar also believes that the imposition of this reduced withholding tax until 30th September is meant to promote documentation and that it will not be withdrawn at any cost. This has led to a confrontation between the PML (N) government and the traders’ community.
The latter believes that not only will withholding tax on all banking transactions cost them heavily in terms of giving more taxes, it will also put them in a state of being exposed to contact with tax hounds.
There are no two opinions about the fact that every potential person is required to pay his or her tax to help enhance the tax-to-GDP ratio which is woefully less than 9 percent and one of the lowest in the world.
Latest details reveal that there are only 1.7 million registered taxpayers in Pakistan, including those 80,000 who filed their tax returns last year. No doubt it is very unfortunate and the situation calls for taking concrete measures to enhance revenues but certainly through better tax administration.
There is, however, another aspect that needs to be considered. Since the introduction of the withholding tax regime, it has been continuously tweaked in terms of different rates for different activities and expanded in its scope to make it an all encompassing phenomenon.
The result has been an increasing ratio of tax collected through withholding agents than by the Federal Board of Revenue (FBR) field formations. Compliance with withholding provisions entails incurring a significant cost for businesses in terms of manpower, time, and allocation of resources.
It is simply not possible for small businesses like a shop or a kiosk or a mom and pop store to allocate the requisite resources and incur such cost of compliance. This too is a major reason behind people’s overt reluctance to run into the tax net and no amount of arm twisting through discrimination between filers and non-filers would coerce them into becoming filers.
Such coercion would only attract their retaliation with increased venom and force. It is therefore imperative that to broaden the tax base and increase the number of tax return filers, the withholding tax regime should be simplified not only in terms of doing away with multiple rates but also in its scope and extent.
The applicability and compliance requirements cannot be the same for corporate and non-corporate. There is a major difference in their capacities and resources and the law must take a sympathetic view of this difference.
So the need of hour is to see whether the ever expanding and complicated withholding regime is an impediment towards efforts aimed at widening the tax net and documentation of economy besides being a burden on all the stakeholders. And, if the finding is in the affirmative, then a corrective action that would facilitate tax compliance without fear of oppression and harassment of taxpayers should be taken in earnest.