KARACHI: The Federal Board of Revenue (FBR) has seen a massive 63 percent growth in withholding tax revenue in five months since the authority joined forces with banks to check unjustified exemptions to service payments abroad, sources said on Tuesday.
The sources said the banks were allowing payments to non-residents by resident Pakistanis under various heads without deduction of withholding income tax.
An individual is liable to withholding tax on payments to non-resident under a section (152 of the Income Tax Ordinance 2001). There are certain payments to non-residents requiring deduction of withholding tax, which include royalty, fee for technical services, reimbursement of expenses, contracts and dividends.
However, certain payments in some cases are exempted from the tax. An exemption certificate must be obtained from the concerned Commissioner of Inland Revenue to avail the facility.
The official said under the section (152(5A)) of the ordinance the commissioner is required to make an order on the application of the exemption.
There are some loopholes in the
law that let people exploit the exemptions when the payments should be subject to the taxation, according to the officials.
“Since such law is directory nature so commissioners in many cases are unable to pass an order,” the official said. “Taking advantage of the law many taxpayers were making payments to non-residents without deduction of withholding tax.”
The sources said the FBR had taken up the matter with the State Bank of Pakistan to ensure deduction of withholding tax from un-exempted payments.
Tax offices also asked the banks to deduct the withholding tax as envisaged under the foreign exchange regulations of the central bank.
“It will be the exclusive responsibility of the authorised dealers [banks and exchange companies] to ensure that income tax has been correctly deducted from the amount payable to the foreign beneficiaries and paid to the income tax authorities or exemption certificate from the income tax authorities is called and recorded with the authorized dealers,” read the foreign exchange manual.
The sources said the SBP and the FBR have planned to introduce legislation to completely plug the loopholes regarding withholding taxation.
The sources said effective checks on the payments to non-residents resulted in massive growth of revenue collection under the head.
According to collection data of Large Taxpayers Office Karachi, the collection under the section (152) surged 63 percent to Rs2.2 billion during the first five months of the current fiscal year of 2020/21. That was compared with Rs1.3 billion in the corresponding period of the last fiscal year.
In November, the collection registered a phenomenal growth of 276 percent year-on-year from Rs150 million to Rs562.7 million.
Source: The News