Withholding tax – a menace for the people and a darling for the FBR

September 12, 2018

People say taxes are a necessary evil and who knows this better than the Pakistani taxpayers: from buying a new car to investing in the stock market or even topping up your mobile phone credit, Pakistanis have been squeezed by the tax authorities at every front.

Consider indirect taxes, such as petroleum taxes. These are regressive taxes because they don’t consider your income level. Whether you are poor or rich you pay Rs10 in petrol tax.

If these indirect taxes, which constitute 65% of the tax revenue, were not enough, the government seems to have a new darling — withholding tax.

Nearly two-third of the government’s total income tax collection in the 2017-2018 financial year was in the form of withholding tax. This is an advance payment that you make on your purchases and sales and claim in refunds while filing your income tax returns with the Federal Board of Revenue (FBR).

For example, when you a buy Suzuki Mehran, you pay around Rs10,000 in withholding tax if you don’t file your taxes and Rs7,000 if you do. But if you’re a filer, you can get this money back. You won’t it back in cash but you could have it adjusted in other areas. For example, the amount could be adjusted by your employer while deducting income tax in the next financial year.

The government’s heavy reliance on withholding tax is because it is facing a budget deficit of Rs2.2 trillion since it spends more than it makes. Even though not many people file tax returns in Pakistan – less than 1% do – the government still hasn’t been able to make more people pay taxes.

Instead, it uses indirect taxes as well as withholding tax to make money. Advance income tax helps the government grow its revenue. For example, the FBR collected 14% more taxes in 2018 compared to the previous year. The FBR collected Rs1.6 billion from direct taxes, like income tax, 65% of which was withholding tax, making it a major moneymaker for the cash-strapped government.

On the flip side, taxpayers suffer because they end up paying more than they owe to the government, which squeezes their pay cheques even further. It also hurts businesses that have to wait longer to claim refunds on advance taxes and are left with less capital to invest in their businesses.​