KARACHI: The Karachi Chamber of Commerce and Industry (KCCI) has put forward a significant recommendation for tax structure reform in Pakistan, focusing on revising the definition of a “withholding agent” to better support small businesses and encourage formalization of the economy.
Budget Proposal Targets Withholding Agent Definition
In its detailed proposals for the upcoming Federal Budget 2025-26, the KCCI highlighted the critical need to redefine who qualifies as a withholding agent under the country’s tax laws.
The chamber argues that the current definition places unnecessary burdens on smaller enterprises and hinders their growth and transition into more formalized structures like private limited companies.
Under the current tax framework, specifically Clause 7 of Section 153 of the Income Tax Ordinance, 2001, certain individuals and associations of persons (AOPs) are designated as withholding agents. Sub-clauses (h) and (i) of this section stipulate that individuals and AOPs with an annual turnover of Rs100 million or more in any of the preceding tax years are required to deduct withholding tax on payments for goods, services, and contracts.
Proposal: Delete Sub-clauses (h) and (i)
The KCCI contends that including entities with a turnover of Rs. 100 million or more within the scope of withholding obligations creates significant administrative and financial pressure. The chamber believes this discourages business expansion and the formalization process due to added compliance costs and regulatory complexities.
To alleviate these issues, the KCCI has formally proposed the deletion of sub-clauses (h) and (i) from Clause 7 of Section 153. The chamber asserts that the existing definition of a withholding agent is excessively broad and unduly burdens small and medium-sized businesses, many of which lack the capacity to manage the intricacies of withholding tax compliance.
Advocating for a Simplified Tax Regime
The KCCI further clarified that individuals and AOPs meeting the Rs. 100 million turnover threshold are often not subject to several other transaction-based taxes. Therefore, enforcing withholding tax on them under Section 153 is seen as serving little practical purpose while simultaneously restricting overall economic growth and formalization.
The KCCI emphasized that reforming the definition of a withholding agent would simplify tax procedures, reduce compliance burdens, and ultimately incentivize more businesses to join the formal sector. The chamber remains a strong advocate for a more practical and growth-oriented tax regime that is better aligned with the operational realities of businesses in Pakistan.
