Are withholding taxes holding back businesses?

Pakistan’s Federal Tax System is a huge puzzle that seems to get more complicated as the time passes. In the last 2 years, 5 different individuals have served in the role of Chairman of the Federal Board of Revenue (FBR) as the institution struggles to catch up with the consistently rising revenue collection targets set by the IMF.

A brief introduction of Pakistan’s withholding regime

Pakistan’s tax system is by design dependent on indirect taxes as the direct tax filing ratio is just around 1% of the total population. To facilitate the process of collecting direct as well as indirect taxes, the Federal Board of Revenue (FBR) implements its withholding tax regime in which taxes are deducted at the source of transaction rather than at filing of the returns. 

The withholding tax laws of Pakistan state that Companies and other prescribed persons, known as withholding agents are required to deduct taxes, on behalf of FBR, while paying to their suppliers, vendors, service providers and employees. 

The tax regulator has devised this mechanism to ensure that tax revenue is collected even if the majority of individuals required to file tax returns are not filing. However, this system is a matter of contention between the Industry and the Regulator.