Budget 2021-22: Govt planning to abolish two dozen withholding taxes

• Govt plans to abolish withholding tax, FED on use of credit cards for 3-5 years. 
• Currently, 40 withholding taxes exist in Pakistan's tax structure. 
• FBR to remove withholding taxes that are causing impediments and resulting in cost escalation.

ISLAMABAD: The federal government is planning to abolish two dozen withholding taxes and is mulling over different proposals to do that. 

Among the proposals that the government is thinking over, one pertains to the usage of credit cards. The government plans to abolish withholding tax and Federal Excise Duty (FED) on these cards for a period of three to five years. 

The move is being seen as an attempt to promote and revive digital economy in Pakistan. Currently, there are an estimated 40 withholding taxes and the government plans to do away with about two dozen of them through the upcoming Finance Bill 2021-22.

Major ones such as the withholding tax on cash withdrawal from banks, contract, supplies and salaries, would continue in the upcoming budget.  Ten to 12 having minimum collection taxes might be abolished.

There is a proposal under consideration that either salary tax rates should be reduced or deductible allowances should be allowed in the budget. In order to reduce litigation, the FBR is also considering different proposals to bring a paradigm shift where various offers would be assigned to taxpayers to settle cases. 

This will be done by paying 20% to 50% amount of total involved amount at different stages of appeals.

According to data available, the Federal Board of Revenue (FBR) has realised that it is collecting a negligible amount against some withholding taxes. It has found that around 7 to 10 withholding taxes contributed to almost 85% of the collections under this head out of the total number of taxes standing at over 40.

The FBR has so far collected a major chunk in the shape of withholding taxes in the current fiscal year and the board is considering to abolish almost half of the existing withholding taxes in a bid to ensure ease of doing business in Pakistan. The FBR now intends to abolish all those WHT where it is causing impediments and resulting in cost escalation.

“The government has decided to keep major revenue spinners of withholding taxes intact in the coming budget. All those WHT will also continue that are used as tool for documentation of economy,” said one top official.

As per its analysis, the FBR collects a major chunk of its withholding taxes from imports, salaries, dividend income, payment to non-resident, payment for goods, services and contracts, exports, electricity consumers, income from property, cash withdrawal from banks and purchase/transfer of immovable property and others. On imports, the FBR has collected Rs400 billion so far.

The WHT tax rate of distributors might be reduced to 0.25%, so it is basically aimed at bringing distributors into the tax net. Another proposal being mulled by the tax machinery is to exempt the withholding tax and GST on waste management for five years.

The government plans to grant tax incentives on Special Economic Zones (SEZ) for a five-year period. The minimum tax rate of 1.5% might be slashed in the coming budget to the tune of 0.5% maximum, so the turnover tax might be fixed at 1% in the coming budget.