ISLAMABAD: The federal government decided on Thursday to retain the currently reduced withholding tax rate on banking transactions for non-filers of income tax returns for another three months without seeking the cabinet’s approval.
The move is in contravention of the leeway permitted by the parliament to non-filers and violates a Supreme Court judgment in the matter, officials said on condition of anonymity.
Due to a poor response, the government is also set to extend the deadline to file income tax returns since only 178,945 people have filed their returns with only two days remaining in the deadline.
The Federal Board of Revenue (FBR) is also set to miss its first-quarter tax-collection target by around Rs25 billion despite showing double-digit growth in collection.
The decision to keep the lower withholding tax rate (0.4% against 0.6%) was taken during an unscheduled meeting between Finance Minister Ishaq Dar and FBR officials.
FBR Chairman Tariq Pasha had urged the finance minister to meet with FBR officials and decide issues pending for the last two weeks due to Dar’s preoccupation with court cases against him, the officials said.
Dar is facing a reference in an accountability court on charges of corruption and making assets beyond known sources of income.
“It was decided that the period of applicability of reduced rate of 0.4% withholding tax on banking transactions for non-filers shall be extended from September 30, 2017 to December 31, 2017,” a hand-out issued by the finance ministry said on Thursday. It added that the finance minister directed the FBR to complete the due process in this regard.
Under the Income Tax Ordinance 2001, powers to change tax rates rest with the Economic Coordination Committee of the Cabinet, which is now headed by Prime Minister Shahid Khaqan Abbasi. A summary to retain the lower tax rate has been forwarded to him for his anticipatory approval, FBR spokesman Mohammad Iqbal said.
However, the August 2016 judgment of the Supreme Court says that any decision on fiscal and taxation matters has to be initiated by the federal cabinet. The government levied the 0.6% withholding tax on banking transactions by non-filers of income tax returns to encourage them to enter the tax net. But due to pressures exerted by the trading community, the government reduced the rates by one-third to 0.4%.
The decision to keep the rates lower also breaches the sanctity of the budget, as it did not bring any change in section 236P of the Income Tax Ordinance through Finance Act 2017 that parliament had passed in June this year. The new decision has also undermined parliament, said an official, adding that it reveals that the government is not serious about penalising non-filers since the number of filers remained at only 1.2 million by end of last year.
The FBR chief also updated Dar on the status of return filers. He said that number of returns received up to September 28, 2017 increased to 178,945 compared with 54,086 returns received till the corresponding date of September 2016.
However, the returns filed are only 14.8% of the number of returns filed last year, suggesting that an extension in deadline is inevitable.
Pasha said that the FBR campaign against non-filer employees in the government and corporate sector through their employers will not only increase the number of returns received but will also result in enhanced tax-collection.
He stated that this increase in income tax collection will result mainly from two factors.
“Firstly, the employer is obliged to collect withholding tax only from the amount of salary disbursed to the employee. The employee may have other sources of income such as property income or return on investment etc. If the employee files his return of income he will be obliged to declare sources of income other than salary and pay taxes on these sources of income.
Secondly, while deducting tax from the salary the employer may not have applied the correct rate of tax applicable or certain elements of the disbursements such as bonuses, honoraria etc may have escaped the withholding tax or may have been subjected to lesser amount of withholding tax,” he said.
The increase in number of employees filing their returns will therefore result in increasing the amount of tax paid due to the aforementioned factors, he added.
The FBR chairman briefed the finance minister on revenue collection during the first quarter of fiscal year 2017-18. Pasha claimed that the FBR was on-course to achieve the revenue target for FY18. However, the sources said that the FBR may miss its first quarter target by about Rs25 billion, as it has collected about Rs710 billion with only one day remaining in close of the quarter.
Published in The Express Tribune, September 29th, 2017.
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