Withholding tax: Banks lack standardized system of deductions, payments: FBR (22-02-2017)

The Federal Board of Revenue (FBR) has found that banks do not have standardized system of deductions and payments of withholding tax under various provisions of the Income Tax Ordinance 2001. Sources told that the issue of deduction of withholding tax by banks was discussed threadbare during Withholding Tax Commissioners' Conference held at the FBR House.

In their presentation on banks, the officials of the RTO Rawalpindi informed the FBR about the study conducted by the said RTO on 'Banks Withholding Regime.' The RTO Rawalpindi recommended that the centralized system gives control to banks' head offices. If properly audited/monitored by IR formations enjoying jurisdiction over banks, it entails effective & efficient payment system, otherwise current central GL A/Cs are suspected to be hubs of tax evasion and tax fraud because huge pool of money is available to banks, liable to be misused.

Banks should be directed to issue deduction certificate of each provision separately. Some amendments in Rules Concerned LTU/RTO may be issued to extensively examine the GL accounts of the bank and verify that (through Branch Codes) the regular branch wise Inflow is covering all the branches across the country.

The RTO Rawalpindi further recommended that the date of deduction by the branch, date of transmission to HQs and date of tax payment and outflow of GL A/Cs are being used only payment of withholding taxes. There is a unified methodology of allowing exemptions.

Sources said that the study of the RTO Rawalpindi concluded no standardized system of deductions and payments in banks. Secondly, prescribed time frame for payment withholding tax is not being followed. Thirdly, the system of GL (General Ledger) accounts are the black holes which need thorough probe and certification mechanism is faulty as non adjustable taxes can be claimed as adjustable and exemption regime is liable to be misused.

During Withholding Tax Commissioners' Conference, it was observed that case study of three banks was carried out for the purpose of withholding tax. It was highlighted that a study on bank's deductions under section 149 of the Income Tax Ordinance 2001 was conducted & communicated to the FBR. While verifying tax deductions in different cases, combined certificates of adjustable/non adjustable have been traced.

Keeping in view the bank's core business i.e. money business, the risk of misuse of available government money is quite high, which requires detailed analysis of withholding tax deductions by banking sector, sources said. The purpose of the study is to examine the existing mechanism of bank's tax deductions at source and time frame for transmission to the department. The study also examined bank's existing mechanism for segregation of filers/non-filers and mechanism of certification of adjustable/non-adjustable deductions of withholding tax.

In case of one bank, there has been found no separate GL (General Ledger) accounts for deductions under different heads. Each withholding transaction is automatically transmitted to head office GL Account and combined certificate is given to clients for all sections. In case of exemption claims, the branch charges tax but sends request to the head office indicating exemption request. Exemptions are allowed after approval of head office in the shape of reverse entries. The study found that as GL is maintained at HQs, therefore, timeframe and evidence of full payment are ascertainable at HQs.

The study of second bank disclosed that each branch has separate GL Account for different withholding provisions U/S 231A & 231AA with the approval from head office, amount is deposited locally. For other sections of withholding, the payment is made by the head office.

In the third case, the RTO Rawalpindi has found that each branch has separate GL Account for withholding taxes for sections 231A, 231AA, 151 and 153. Subsequently the amounts are transferred to head office with a lapse of 7-10 days and head office reportedly makes payments but this can be verified from their GL account. The overall findings of the banks revealed that no standardized system of deductions and payments in Banks and exemption regime may liable to be misused.

Sources added that the meeting also discussed comprehensive plan for improving withholding tax collection in remaining period of 2016-17 to overcome the revenue shortfall through withholding taxes. Sources told

 that the FBR has issued instructions to field formations to suggest measures and recovery plan for increasing withholding tax collection in the remaining period of current fiscal year. The withholding taxes contributed a major chunk i.e. around 68-70 per cent to the collection of direct taxes in 2015-16. The nine major components of withholding taxes that contributed around 85 per cent to total WHT collection are contracts, imports, salary, telephone, export, bank interest/securities, cash withdrawal, dividends and electricity in 2016-17.

The conference carried out in-depth analysis of withholding taxes by the regional tax offices (RTOs); updated stock position of withholding agents specifying the category; whether withholding statements are filed by agents, if not action taken so far along with amount of penalty and number of orders passed thereof, and whether the tax is being deducted as per prescribed rates and deposited timely.

Field formations informed FBR the number of orders passed u/s 161/205 of the Income Tax Ordinance in case of default by the withholding agents; analysis of major withholding sections of the RTO. In case of reflecting growth; how to further maximize them. 
The RTOs shared the mechanism for the enforcement, monitoring and verification of various withholding provisions regarding filers/non filers; month-wise collection out of current and arrear demand created u/s 161/205 and implementation of newly introduced withholding sections along with revenue impact.