That traders and transporters strike against the levy of 0.6 percent withholding tax on all bank transactions is a development that has been widely seen as routine muscle flexing by a powerful pressure group in the face of an attempt by the government to bring it into the tax net.
It is extremely unfortunate that periodic attempts by successive governments to enhance documentation through the introduction of mandatory filing of returns have invariably been successfully thwarted by pressure groups.
Hence the current round of strike calls is being unambiguously seen as an attempt to pressurise the government to withdraw the withholding tax on bank transactions.
The question being asked is whether this particular tax on all bank transactions can be supported in its current form or whether some clarification/amendment is warranted. First off, the government would be well advised to exclude all those who are not required to file returns under the income tax act inclusive of agro sector as well as pensioners and account holders resident abroad.
Refunds are a complicated process in Pakistan and inordinate delays the norm. Secondly there is a need to simplify the return forms to ensure that relatively small businesses can fill these forms themselves and are not compelled to procure the services of pricey tax consultants.
At present, around 70 percent of all direct taxes collected are withholding taxes, given that the Finance Ministry defines withholding tax as a direct tax, and this trend is disturbing. Enhancing documentation of the large parallel illegal economy has long been an objective of successive Pakistani governments backed by international donor agencies as well as bilateral and multinational investors in Pakistan.
Business Recorder has long been an ardent advocate of not only taxing different income levels, irrespective of origin of their income at a uniform rate. This would necessitate an amendment in the country’s constitution, as at present, the federal government cannot tax farm income. However, if provincial governments enact income tax law that mirrors the federal act and collect tax on farm income, it would obviate the need to amend the constitution.
There is also an ongoing tussle between the federal and provincial governments as the latter feel that the former is encroaching upon their constitutional domain of taxes. For example, it is fairly inexplicable that the FBR is engaged in negotiations with transporters with respect to withholding rates even though it is not engaged in collection of these taxes. It is hoped that the FBR focuses on improving its own collections.
The FBR, in its submissions to the International Monetary Fund (IMF), is not only overestimating its own collections through taking credit for those taxes that are collected by withholding agents, but is also focusing on sending notices to over quarter of a million potential tax payers. This is an IMF condition under the 6.64 billion dollar Extended Fund Facility. However, the process of taking an appropriate action against these potential taxpayers is extremely slow.
The Finance Ministry points out that any attempt to enhance documentation of the economy necessitates the levy of a withholding tax as it would bring the income of the current non-filers into the tax net.
It is further argued that after the expiry of the amnesty from audit for the tax on bank transactions (three years) it would then be in a position to begin higher income tax collections. Again, there would be a few detractors within the general public against such logic; however, the government needs to look at the overall tax structure which requires major changes to render it equitable and fair.
The current situation is that traders/transporters are desisting from making any withdrawals over and above the 50,000 rupee per day limit, as that would automatically lead to payment of the withholding tax, and additionally are not making any further deposits into the banking system.
If this trend continues, the parallel undocumented Pakistan economy would simply increase and defeat the very purpose of the levy as well as fuel inflation. In other words, a delicate balance needs to be maintained with a greater short- and medium-term focus not on withholding taxes but on those collected by the FBR with filed tax returns.