ISLAMABAD: The share of withholding taxes has dropped to slightly over two-thirds of total income tax collection in first half of the current fiscal year due to a combination of court decision and legislative changes, which may bode well for the government’s plans to rely less on withholding taxes.
From July through December of fiscal year 2018-19, the Federal Board of Revenue (FBR) collected Rs449 billion in withholding taxes of over 48 types. Their share in the total direct tax collection was nearly 68% in the current fiscal year, down from 74% in the corresponding period of previous year.
In July-December FY18, the FBR had collected Rs491.5 billion in withholding taxes, which was equal to 74% of direct taxes.
Overall, the withholding tax collection decreased 8.7% or Rs42.6 billion in first half of FY19, which has thrown a challenge to the FBR to go after high net-worth individuals to enhance direct tax collection.
Finance Minister Asad Umar has announced a gradual reduction in reliance on withholding taxes and is also resisting pressure to increase the sales tax rate to meet additional revenue requirements.
The withholding tax collection decreased primarily because of three main factors – cut in income tax rates for the salaried class, squeeze on the Public Sector Development Programme to make up for the increasing cost of debt servicing and defence expenses and the Supreme Court’s decision to stop withholding tax collection on pre-paid mobile phone cards.
The cumulative negative effect of these three measures came in at Rs67.3 billion for July-December of the current fiscal year, according to the FBR’s statistics.
If the total of 48 major withholding taxes, the collection of 16 taxes went down including the above-mentioned three heads. If any of these decisions are reversed in coming months, including the apex court’s decision, the share of withholding taxes may go up again.
The FBR has been given annual tax collection target of Rs4.4 trillion for the current fiscal year, but results of first seven months suggest that it will miss the target by a wide margin.
Last month, Prime Minister Imran Khan directed the FBR to increase tax collection through unorthodox measures. He told the FBR to start provisional tax assessment of high net-worth individuals and the assessment should be separated from audit functions to make sure taxmen go after high-value targets.
However, so far the FBR has been able to recover only Rs245 million after sending over 6,100 tax notices to the high net-worth individuals.
The FBR’s tax collection from salaried persons fell Rs25.4 billion or 44% to Rs32 billion in the first half. The previous Pakistan Muslim League-Nawaz (PML-N) government had cut income tax rates for the salaried class, which the current Pakistan Tehreek-e-Insaf (PTI) government largely maintained, except for those earning more than Rs2.5 million annually.
