LAHORE: In house studies conducted by the Federal Tax Ombudsman Secretariat revealed systemic gaps and loopholes in the prevalent withholding tax monitoring and payment system particularly in the banking sector.
The studies revealed that commercial banks in Pakistan normally avoid field audits of withholding taxes on one pretext or another on the grounds, that banks have developed centralized & credible software for tax withholding and that withholding audit will trespass into the privacy and confidentiality of their client’s data.
In order to investigate the current withholding and payment system with a view to identifying systemic loopholes and leakages of tax at the stage of deduction and transmission to the treasury, and to making recommendations for the purposes of developing an automated and integrated withholding tax deduction and payment monitoring system, an investigation was initiated as Own Motion in exercise of jurisdiction conferred under Section 9(1) of the Federal Tax Ombudsman Ordinance, 2000 (FTO Ordinance).
While conveying the reasons for conducting ‘Own Motion’ investigation, the FBR was asked to share data of action completed on account of default of withholding taxes and to also share current withholding strategies for monitoring of withholding of taxes and credit of such payments to the government along with future plans for reforming withholding tax deduction and payment system.
FBR reported to FTO the current strategy for monitoring of withholding taxes in the banking sector. They stated that field formations have conducted random system audits of the banks falling under their jurisdiction from time to time by visiting the head offices and branches of these banks.
However, data shared with this office during investigation did not support stance of FBR. It is observed that total demand created shared by FBR from LTO Karachi is Rs. 38,149/- million as a result of initiatives made u/s 122(5A) and 161.
Out of the said demand, Rs794/- million is attributed to proceedings u/s 161 which constitutes 2.08% of the total demand created. When demand of Rs127/- million created u/s 151, 153 and 155 is taken into account, the percentage of demand created attributable to withholding tax further falls down to mere0.33%. Such low percentage of default indicates that the attention given to monitoring of withholding tax is way low as compared to focus on invoking section 122(5A).
Analysis of data further revealed that in case of a bank, default demand was created to the tune of Rs. 667/- million for two tax years on account of non-deduction of tax u/s 154.The quantum of tax demand created showed that deduction u/s 154 is high risk area which should have been focused for effective monitoring or audit not only of the bank involved but also other banks and exchange companies involved in deduction of tax u/s 154 (exports).
However, no such exercise was undertaken by FBR or their field formations despite huge default u/s 154. This substantial default indicates that internal controls of banks as well as the monitoring control of the regulator (FBR) are weaker which are required to be upgraded to bridge gaps in enforcement mechanism of withholding tax regime under section 154 in particular and for other sections in general.
Banks are required to make deductions of tax on various heads of payments which mainly include section 151 on account of profit on debt, 152 (1C), (1D), (1DA), (IDD) on account of payment to non-resident, collection of tax under section 231A and 231AA. Deduction of tax under all these subsections are required different rates of tax which range from 10% to 15%.
There is variation in applicable rate of tax for section 151 which now carries rate of 15% whereas in the past it also carried rate of 10%. Besides, there is variation in applicable rate under section 231A which saw frequent changes from rate of 0.3% to 0.6% and at times had different rates for filers and non-filers. The investigation further revealed weaker areas where transactions could be manipulated.
Evasion can majorly be done by either applying ATL rates to non-active taxpayers, not deducting withholding tax at all while crediting profit on debt or, deducting tax on profit on debt but not crediting in the Withholding Tax account instead crediting in any other account. It was therefore necessary to conduct system audit to see if the various rates of deduction have been inserted by banks into their software.
The data provided by the FBR shows that no such system audit has been conducted by the field formations and even number of audits of statements conducted by field formations is negligible. In addition, the facts shared during investigation show that there is substantial time runover and the pilot projects conceived could not been initiated even after lapse of over 6 months.
This changing of goal posts and time targets created serious hurdles in the way of implementation of different projects and, in consequence, revenue continued to suffer leakages and shortfalls. The department should have taken notice of these serious lapses and ensure that projects to ensure various phases of implementation thereof are completed within prescribed time frame so that the improved withholding tax monitoring system could be put in place in the shortest possible time to safeguard rights of all stakeholders.
Analysis of new initiatives on SWAPS and Business Process Re-engineering revealed that systemic gaps and loopholes exist in the prevalent withholding tax monitoring and payment mechanism and that integrated, automated response is required to bridge these gaps through strengthening legal and enforcement mechanisms and inducting digital modes and portals in processes and systems for real-time feedback and responses to all the stakeholders particularly the regulator for timely remedial and corrective action.
The FTO recommended that SWAPS and their components including Functional Specific Documents (FSD) and consequential software solution be completed within specific timeframe to avoid time and cost runovers.
It was further recommended that Business Process Re-engineering and linkages with IRIS, ATL and PSID should be fully integrated from end-to -end without human interface so as to avoid any tampering with and manipulation of data.
Further, Data Analysis Cells should be established at Board as well as at field formations to analyze and convert voluminous data received from banks into actionable information and for retrieval of loss of revenue. Correspondingly capacity of field formations for systemic audit of WHT software be enhanced in terms of HR and technical expertise. It was further recommended that Audit of banks WHT software and system audit should be regularly conducted to check compliance with the WHT provisions. The FTO directed that the FBR should share progress with their Secretariat in respect of recommendation on quarterly basis.
