Withholding Tax

Introduction

Major sources of Tax Revenue in the country are federal taxes comprising of Income Tax, Sales Tax, Custom duties and Federal Excise Duty. Out of total collection of Rs.581 (b) for current financial year up-to February, 2008 the share of Income Tax comes to Rs. 212(b) i.e. 37 % of the taxes collected by FBR. Within total Direct Tax revenue, 41% comes from various withholding taxes, which are characterized by their adjustable and presumptive nature.
Withholding taxes are part of tax system ever since imposition of direct taxes by the governments. In recent years, globalization has forced many countries to alter their economies to harmonize tax policies and alignment thereof with new trade and investment policies embodied in the free trade agreements. The concept of “Hang Together” is more relevant today than ever before. Countries can neither close their borders nor their economies. Tax policies can not be isolated from the international economies either. Tax competition is almost an un-alloyed evil, working as a constraint on governmental over-reach. Countries, therefore, have to take positive steps to protect the integrity of their individual and corporate tax systems from the competition so engendered.
 

Withholding Taxes in Pakistan

Short history

Withholding is an act of deduction or collection of tax at source, which has generally been in the nature of an advance tax payment. It is an effective mechanism and important/timely source of revenue. Their contribution is about 41 percent of total direct tax revenues. Increase from Rs.5 (b) in 1991 to above Rs 169(b) in 2007 speaks of exponential growth and consequential heavy reliance on withholding taxes in Pakistan.
 Under the repealed Income Tax Act, 1922, tax was deducted from two main sources of income; namely, salaries and interest on securities. Over the period of time, Withholding Tax net was extended, by steadily introducing different Provisions in the Tax Laws. The repealed Income Tax Ordinance, 1979, brought in all the provisions of the Income Tax Act, 1922. However, in the 1990s, withholding tax net was expanded extensively by providing for withholding tax on a wider variety of transactions and making most of them presumptive. Provisions of the Income Tax Ordinance, 2001, are more or less the same, except for a few changes and additions. Important withholding provisions relate to salary, imports, exports, commission and brokerage, dividend, contracts, profit on debt, utilities, vehicles tax, stock exchange-related provisions and non-residents, etc., with varying rates.