Withholding Tax Regime is a global phenomenon and in Pakistan the major source of the Federal revenue collected on national level. The collection as well as dependence on Withholding Taxes is on the rise over the years. Out of total Direct Taxes collection of Rs, 740(b) for financial year 2012 Rs, 422(b) with percentage share of 57% came from various Withholding Taxes, which are characterized by their adjustable and presumptive nature. Withholding Taxes regime in one or the other way is part of tax system ever since imposition of direct taxes by the governments and taxpayers on two scores;
To the government, provides revenue regularly throughout the year for its expenditure and operations.
To the taxpayers, provides an opportunity to discharge their obligations in manageable installments.
In recent years, globalization has forced many countries to alter their economies to harmonize tax polices 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. In view of such competitive environment there was a need to have an organization to monitor and manage the system of Withholding Tax Regime, therefore the Directorate General of Withholding Taxes was created through Finance Act of 2008 under section 230A of the Income Tax Ordinance 2001.
Withholding is an act of deduction or collection of tax at source, which has generally been in the nature of an advance tax payment. It is an effective mechanism and important/timely source of revenue. Their contribution is about 41 percent of total direct tax revenues. Increase from Rs.5(b) in 1991 to above Rs 422(b) in 2012 speaks of exponential growth and consequential heavy reliance on withholding taxes in Pakistan.
Sales Tax Act of 1990 also provides for mechanism of Withholding. Vide SRO No. 660(1)/2007 dated 30th June 2007 special procedure under the title of Sales Tax special procedure (Withholding Tax) Rules 2007, was introduced. Though within the Sales Tax structure share of Withholding Tax is quite minor and its scope is limited only to five types of Withholding Agents. But still there is further room for broadening its base.