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Withholding Tax
Introduction
Major sources of Tax Revenue in the country are
federal taxes comprising of Income Tax, Sales Tax, Custom duties and
Federal Excise Duty. Out of total collection of Rs.581 (b) for
current financial year up-to February, 2008 the share of Income Tax
comes to Rs. 212(b) i.e. 37 % of the taxes collected by FBR. Within
total Direct Tax revenue, 41% comes from various withholding taxes,
which are characterized by their adjustable and presumptive nature.
Withholding taxes are part of tax system ever since imposition of
direct taxes by the governments. In recent years, globalization has
forced many countries to alter their economies to harmonize tax
policies and alignment thereof with new trade and investment
policies embodied in the free trade agreements. The concept of “Hang
Together” is more relevant today than ever before. Countries can
neither close their borders nor their economies. Tax policies can
not be isolated from the international economies either. Tax
competition is almost an un-alloyed evil, working as a constraint on
governmental over-reach. Countries, therefore, have to take positive
steps to protect the integrity of their individual and corporate tax
systems from the competition so engendered.
‘Withholding
tax on the issuance of banking instruments’
ISLAMABAD: Senate Standing
Committee on Finance has recommended amendments in the Finance Bill
(2010) to include exchange companies and non-banking financial
institutions for levy of 0.3 percent withholding tax on issuance of
banking instruments like rupee travelers cheques, pay orders and
demand drafts etc upon receipt of cash from their customers.
However, the committee was informed that bank-to-bank transactions
and transactions from one account to another would remain exempted
from the withholding tax. On the suggestion of the Senator Ishaq
Dar, the committee unanimously recommended amendments in the Finance
Bill (2010) so that the exchange companies and non-banking financial
institutions would be brought within the ambit of section 321AA of
the Income Tax Ordinance 2001. It has been further recommended that
the withholding tax should be applicable in cases where cash has
been used by the exchange companies and non-banking financial
companies to make pay orders etc to ensure documentation. Senator
Ishaq Dar pinpointed that a large number of transactions have been
made through exchange companies and non-banking financial
institutions, which needs to be brought within the ambit of
withholding tax provision.
Federal Board of Revenue (FBR) Chairman Sohail Ahmed said that the
FBR and the State Bank of Pakistan (SBP) would soon convene a
meeting to discuss the issue of withholding tax on different modes
of banking transactions. In the open market, business of pay orders
is taking place to operate out of the documented regime. This 0.3
percent withholding tax would not have any implication on the common
people, as it is applicable on cash withdrawal from banks of over Rs
25,000 in a single day. On the same issue, FBR Member Direct Taxes
and official spokesman Israr Rauf said that 0.3 percent withholding
tax would not be applicable on inter bank transfers of funds and
online bank-to-bank transactions. He informed the SSC on Finance on
Wednesday that the withholding tax would not be applicable on the
intra bank transfer of funds and cross cheques. Any account holder
transferring funds from one bank to another would not be subject to
the withholding tax. The provision has been introduced to encourage
documentation in the country. The scope of the withholding tax,
which is applicable on cash withdrawal from banks, has been expanded
to other banking instruments. If anyone uses cash for making Demand
Draft or Pay Order etc, the withholding tax would be applicable. On
the other hand, if a person has been engaged in transactions through
bank, this withholding tax would not be applicable. The purpose of
the levy is to discourage transactions through cash. When a
committee member asked about the situation if a person deposits the
cash in his account and then transfers the funds, Israr Rauf said
that such banking transactions would be exempted from the
withholding tax. staff report
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