Withholding (WHT) Tax Payable to FBR
What is WHT or Withholding Tax?
Withholding Tax (WHT) is the type of Advance Income Tax that is deducted from taxpayers through Withholding agents of FBR. Every company, Banks and Govt. department deduct withholding from the bills payable.
It is the process of collecting taxes to generate revenues by the way of direct taxation. In Pakistan, Withholding Taxes regimes are the major source of Federal revenue collection on a national level. Withholding taxes are the global phenomenon as the major source of revenue generation. Advance taxes paid by taxpayers can be refunded, if applicable, by the government at the end of a fiscal year.
Many countries have been forced by globalization in recent years to harmonize their tax policies and align them with new trade and investment policies that are embodied in free trade agreements. The concept of “Hang Together” has more relevance today than ever before. No country can close its borders or close its economy. International economies cannot be separated from tax policy either. An organization was needed to monitor and manage the Withholding Tax Regime in such a competitive environment. Consequently, the Directorate General of Withholding Taxes was established by the Finance Act of 2008 in accordance with section 230A of the Income Tax Ordinance of 2001.
Withholding Tax in Pakistan
- Income Tax:
Withholding refers to the act of deducting or collecting tax at the source, which in most cases has the nature of an advance tax payment. Withholding is an effective tax collection mechanism and a timely source of revenue. Direct tax revenues from withholding constitute 41 percent of total direct tax revenues. It is evident from the increase from Rs. 5(b) in 1991 to over Rs 422(b) in 2012 that Pakistan is experiencing exponential growth and therefore heavily dependent on withholding taxes. In the aftermath of the repeal of the Income Tax Act, 1922, taxes were deducted from the following two sources of income:
- Salaries
- Interest on securities
Through the gradual introduction of different provisions into the tax laws, the Withholding Tax net evolved over time. All the provisions of the Income Tax Act, 1922 were brought into law by the repealed Income Tax Ordinance, 1979. The withholding tax net was significantly expanded in the 1990s, as withholding tax was included in a much wider variety of transactions, and the majority of them were presumptive. Except for a few changes and additions, the Income Tax Ordinance, 2001, remains largely unchanged. In general, withholding provisions apply to salaries, imports, exports, capital gains, commissions and brokerages, dividends, contracts, and profits on debt, utilities, vehicles tax, stock exchange-related provisions, and non-residents with varying rates.
- Sales Tax:
Sales Tax special procedure Rules were introduced on 30th June 2007 as a mechanism of Withholding. Within the Sales Tax structure, the Withholding Tax is quite minor, and its scope is limited to just five types of Withholding Agents. The tax base can still be widened in the future.
Why does the government impose Taxes when they are to be refunded?
Withholding Taxes are to be calculated at the end of a fiscal year. If these taxes are to be returned then why does the government collect these taxes? It is because the government has to keep the records of income and sales of every individual and company, the advance taxes collected are to be refunded to filers at the end of a fiscal year. Those who earn less than Rs. 800,000 annually are eligible to refund their taxes and those earning more than Rs. 800000 can pay their total taxes subtracting the refundable taxes they paid during the fiscal year.
An individual can only claim a refund if they have filed their income tax return electronically. Refunds cannot be claimed by filing a manual return. Your Income Tax Return in Iris Portal of FBR should clearly show your refund amount. Filing a separate IRIS application is required for the claim of tax refunds resulting from the Income Tax Return. If you wish to claim your refund later after submitting your Income Tax Return, you must do so within two years of the date when you filed the return (date of assessment), or two years after getting the refund from the date the tax was paid.
Purpose of Withholding Tax:
Withholding tax has important reasons for being introduced. They include:
- Generating and increasing revenues on a national scale
- Utilize the cash flow coming from WHT more efficiently
- The goal is to reach the maximum number of filers
- People are encouraged to pay their taxes as a responsible citizen
- The purpose of the act is to ensure that those outside the tax net are included in the system
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