This paper looks at the withholding tax regime and assesses the impact of the present regime on taxpayers. We found that the Emphasis of Pakistan’s revenue stream is on indirect taxes rather than direct taxes, both at Federal level and Provincial level. During FY2021-22, 67% of FBR’s direct taxes came from withholding taxes. Similarly, share of indirect revenue in total provincial revenue of Sindh, Punjab, Khyber Pakhtunkhwa and Balochistan, remained at 98%, 85%, 86% and 95% respectively.

We discovered a long list of categories and rates of withholding tax in the Income Tax Ordinance, 2001. Rates of withholding tax for corporate and non-corporate entities are different. Withholding tax rates to be applied for persons whose name is on active taxpayers’ list and for persons whose name is not on active taxpayers’ list, are also different. The issue of double taxation and even multiple taxation exists under prevailing tax law.

A withholding agent is made to go through a complex and lengthy procedure to comply with the provisions of Income Tax Ordinance, 2001.  These include the deduction of tax, deposit of tax into Government Treasury, reporting of withholding tax details to FBR through filing of periodic withholding tax statements, reconciliation of withholding tax statements with financial statements, assessment, audit, and verification of withholding record of withholding agents, issuance of tax deduction certificates to taxpayers evidencing deposit of withholding tax into Government Treasury.

The withholding sales tax regime prevailing in every province/territory of the country is different. If withholding sales tax categories and rates pertaining to every province/territory are taken together, these are massive, as in the case of income tax. Cost of doing business for withholding agents in Pakistan, with the existing withholding income tax and withholding sales tax regime, is on much higher side, with no benefit at all from the principal taxation authorities.

We have made five recommendations i.e., simplified WHT regime at both Federal & Provincial level, make withholding taxes adjustable, apply same withholding rules to sales tax on services in every province, minimize reporting requirements,  and eliminate strict audits and assessments of withholding agents.