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Mechanism of withholding tax.

The right of Islamic State to raise resources through taxes cannot be challenged provided taxes are levied in a just and equitable manner. However, it should be noted that only a just and equitable tax system has been held to be in harmony with the spirit of Islam. It is unfair and inequitous to levy excessive taxes incompatible with the rights of the people. Therefore, the rationalised tax system would lead to an increase in tax revenues and ultimately result in the development of the country.

Levy of Taxes

It is difficult for a developing country like Pakistan to choose between direct and indirect taxes. The ratio of direct taxes to total revenues is very low in our country as compared to other developing countries. Taxation System which relies heavily on indirect taxes is regressive in its nature and import which reflects the narrowness of the tax base. Because of such a situation, the lever of higher tax rate is applied in order to achieve the budgeted targets and unfortunately higher rate of taxation breeds corruption. The broad-basing of the tax net has become a budget slogan and nothing concrete has been done in this direction except few adjustments here and there which too are devoid of any desired result in the absence of proper implementation.

Afterall, the national exchequer in search of generating revenues, has to utilize the available resources to meet the development and defence needs. In this context, political considerations outweigh economic priorities and as such the levy of taxes is not just and equitable. Fairly large portion of the potential tax-payers continues to remain out of the ambit of taxation one way or the other.

At the expense of economic development, such a policy is bound to crumble under the strain of unchecked corruption, rising debts and increased demands for allocation of funds for various on-going and in-planning development projects. Numerous socio-economic and political problems crop up in the wake of falling economic health.

Burden of Tax

The narrow tax base culminates into heavy tax burden on those who are already in the tax net. Thus, the sufferers are existing tax-payers. The National Taxation Reform Commission has also highlighted this fact in these words: "Pakistan's present income tax base is far from fair and as a result, the tax burden has not been distributed fairly among the population".

According to NTRC, the taxable income which escaped the tax net was Rs. 5,076 crores as against an assessed income of Rs. 1,930 crores. Hence, the total assessable income was Rs. 7,0006 crores i.e. more than three times that actually assessed. Under the present set of circumstances, one is compelled to conclude that the tax-laws, the tax-administration and the tax-payers severally and jointly contribute towards the element of inequity.

In order to expand the income tax base, certain measures will have to be taken to solve the problem of pinch and inconvenience to the tax-payers and more so to obviate the risk of tax evasion. The widening of tax net irrespective of sector or type of economic activity, graduated tax rates, proper and effective mode of accountability, tax education among the people,. etc. would go a long way in achieving the desired results without resorting to undue pressurised tactics to generate funds.

Withholding Tax

The significance of withholding tax in recent years has increased tremendously as substantial amount of income tax is now being collected through the mechanism of withholding tax. There has been so much reliance on it that although a direct tax, it has been transformed into indirect tax because the affected persons in most of the cases recover this levy from their customers. However, in order to widen the tax net, new revenues are tapped to bring more and more persons in the ambit of taxation and also to arrest tax evasion.

Section 50 of the Income Tax Ordinance, 1979 which deals with the deduction of tax at source has undergone numerous amendments and additions since its inception and in its existing legislation in the book, it is loaded with as many as 15 sub-sections including 7 fresh amendments and additions through the Finance Act, 1989 which reflect the sad state of affairs as regards levy and collection to taxes. Moreover, there is levy of capital value tax this year. Inspite of such an establishment to cope with the taxation matters, the machinery of collection has not come upto the required standard and consequently the functions to be performed are shifted gradually to other agencies in the shape of withholding tax. The relevant provisions of Section 50 are briefly discussed hereunder:- 1) Sub-section(1) of Section: 50 deals with the deduction of tax at source from salary income. 2) Sub section(2) is regarding tax deduction from Interest on Securities. 3) Sub-section(2A) was inserted through Finance Ordinance, 1984 whereby tax at the rates specified in the First Schedule i.e. @ 10 per cent was to be deducted by banking company while paying any sum by way of interest on an account or deposit. However, applicability of this provision was withdrawn after 30th day of June, 1985 vide Finance Act, 1985. But, it has again been revived through the Finance Act, 1989 embodying that with effect from July 1, 1989 bank interest/profit exceeding Rs. 100,000 in a financial year, shall be subject to a withholding tax of 5 per cent. Tax is to be deducted on the entire amount if it exceeds Rs. 100,000. 4) Sub-sections (3) and 3(A) envisage tax to be deducted from payments to non-residents. 5) Section 50(4) deals with deduction of tax for supply of goods and services at the prescribed rates as per First Schedule.

Certain conditions are laid down for the payers as well as recipients to come under the purview of this sub-section. There are exemptions also for non-deduction of tax. However, time and again amendments are made to net new assesses and to collect more tax revenues from the existing tax-payers. That is why, there is colossal amount of refund falling due to the assessees because of heavy rate of deduction ranging as high as between 3 per cent to 10 per cent on most of the supplies and services. This year's amendment in Clause:2 Part-IV of Second Schedule regarding certain payments made by private companies has widened the area of deduction by requiring companies, having paid-up capital of Rs. 20 lacs or more to deduct tax u/s 50(4). Previously, the limit of Paid-up capital was Rs. 30 lacs. 6) Sub-section (4A) of Section 50 has been added by the Finance Act, 1989 which lays down that withholding tax @ 10 per cent be deducted from the payment on account of brokerage or commission if it exceeds Rs. 50,000 in any financial year. This new stipulation collides with the already existing sub-section 4 in which tax @ 3 per cent is to be deducted from payments exceeding Rs. 10,000 in any financial year on account of services rendered and certainly payment of brokerage or commission is in the category of services. It, therefore, appears that new sub-section (4A) over-rides the provisions of sub-section 4 regarding payments on account of brokerage or commission by attracting deduction of tax @ 10 per cent. However, in order to comply with the provisions of law, a payer will have to deduct tax at the specified rate even if the amount does not exceed Rs. 50,000 but exceeds Rs. 10,000. 7) Under section 50(5) tax was being collected at the rate of 1 - 1/2 per cent and 2 per cent from the importer of goods at the import stage. In order to facilitate the assessees, exemption from deduction of tax was granted by the Commissioner of Income Tax to those who were liable to pay advance tax under section 53 of the Income Tax Ordinance, 1979 vide SRO 535(I)88 dated 26th June, 1988. But, this exemption has now been taken away vide SRO 567(I)89 dated 3rd June, 1989 as such deduction of tax will continue in any case whether liable to advance tax or not, however, at the reduced rate of 1 % or at full rate of 2 % as the case may be. 8) Sub-section (6) of Section: 50 has been amended w.e.f. 1.7.89 to cover passenger transport vehicles with seating capacity of ten or more passenger, in place of existing limit of 20 persons. Rates have also been revised for collection of Income Tax under this sub-section. In case of passenger transport vehicles, rate has been increased from Rs. 15 to Rs. 20 and from Rs. 20 to Rs. 25 per seat per annum and for goods transport vehicles, a new levy of Rs. 300 per annum for vehicles with less than registered laden weight of 2030 kg. and for 2030 kg. and above, rate increased from Rs. 1000 to Rs. 1200 per annum. 9) A new sub-section(6A) has been inserted in Section 50 thereby requiring companies listed on Stock Exchange in Pakistan, National Investment (Units) Trust and Investment Corporation of Pakistan to deduct tax @ 7-1/2 per cent with effect from 1st July, 1989 from dividend payments to shareholders, not being companies, where the amount of such dividend exceeds Rs. 15,000 in a financial year.

Clause 80 of Part I of the Second Schedule has been amended to restrict exemption to dividend income under clause (a), (cc), (d), (e), and (f) upto Rs. 15,000 which was hitherto wholly exempt. It may be added that the levy of tax on dividends has been made effective from the assessment year: 1989-90 as such assessees had to pay tax @ 7-1/2 per cent on dividend income for the said assessment year. This is yet another step towards spreading the tax-net and bring to books such persons who were enjoying tax-free income. 10) Sub-section (7) is regarding the tax to be paid by the domestic company as specified in the First Schedule on bonus shares or bonus issued to its shareholders. 11) Sub-section (7A) was added through Finance Ordinance, 1981 which required the collection of advance tax at the specified rate i.e. 3 percent on the basis of the sale price of any property other than a plot of land through public auction belonging to the Government, a local authority, a public company, a foreign association, a foreign contractor or consultant or consortium. It also attracts awarding of any lease as well as leasing rights to collect octroi, duties, tolls, fees or other levies by whatever name called. Sales made through public tenders too fall within the purview of this sub-section. 12) Sub-section (78) is also the new addition, applicability of which is from July 1, 1989. This sub-section has tapped the housing sector to a certain extent which has flourished over the years but escaped the required tax incidence somehow or the other. It embodies that the withholding tax @ 5 per cent is required to be deducted from rent (including payment by way of an advance) of house property which includes rent of furniture and fixture also paid by or on behalf of Government, a local authority, a company or the diplomatic mission of a foreign State where the annual rent of such property exceeds Rs. 100,000. 13) Under Section 7 of the Finance Act, 1989 Capital Value Tax @ 5 per cent has been levied which is payable w.e.f. 1.7.89 by every individual who is not assessee and acquires by purchase an asset or a right to use thereof for more than twenty years. The assets covered by this levy are as under:- (i) urban immovable property exceeding 250 sq. yards. (ii) motor vehicles not plying for hire exceeding 800 cc.

The person responsible for registering or attesting the transfer of the concerned cases shall collect the tax from the purchaser or transferee before registering or attesting the transfer.


The concept of withholding tax although appears to yield increased collection yet it has given birth to many administrative and economic problems such as huge sum of refund, verification of tax deducted at source, inherent delay in processing of refund cases, tax deductions treated as rising costs, liquidity problem to assessees due to heavy deductions, etc..

Sometime back, the Asian Development Bank released the outcome of the study of tax system in certain developing countries which reflected that the complex
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Author:Karim, Zakaria
Publication:Economic Review
Date:Apr 1, 1990
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