Problems Under The Withholding Tax Regime [WHT]

“Income tax allows the government to confiscate the wealth of its citizens. The curse of the withholding tax is that it allows the government to commit this crime systematically, effortlessly, painlessly, and benevolently” – [Laurence M. Vance].

Withholding is an act of deduction or collection of tax at source and is in the nature of an advance tax payment. Historically, the contribution of Withholding Tax was 41 percent of total direct tax revenues but now it is contributing more than 90% of the Regional Tax Offices.

Income Tax Act, 1913 and 1918 did not contain any provision for withholding tax, however, under repealed Income Tax Act, 1922, tax was deducted from two main sources of income – Salaries and Interest on securities and the position remained intact under the repealed Income Tax Ordinance, 1979.

However, in the early 90s, withholding tax net was expanded extensively by providing for withholding tax on a wider variety of transactions and making most of them presumptive. In the Income Tax Ordinance, 2001, provisions are more or less the same, except for a few changes and additions.

Important withholding provisions relate to salary, imports, exports, commission and brokerage, dividend, contracts, profit on debt, utilities, vehicles tax, stock exchange-related provisions and non-residents, etc., with varying rates. This article is an endeavor to highlight the issues in the withholding tax regime.


Following types of transactions covered under the WHT Regime.


Reduction in tax rate is the worst decision implemented through the Finance Act, 2008 that was nothing but at the cost of death of local industry and 400% reduction in collection. A mere trader of import items is absolved from audit not only in Income but also in sales tax. It is suggested that SRO 638(I)/2005 requires fresh thought in the light of SRO 947(I)/2008 as we need to promote raw material import and capital equipments.

In furtherance, the import of home consumption goods including of those returning to Pakistan during the global economic crises need to be excluded from the purview of section 148. In more furtherance, clause 13C of Part II of 2nd Schedule seems excessive as it contains 2% rate while general rate are also 2%.

Moreover, the concept of tax on tax in the definition of value of goods provided in sub-section (9) of section 148 needs to be eliminated. The revenue authorities need to collect revenue gracefully not in the garb of valuation mechanism. The tax under section 148 needs to be collected on value of goods under the Customs Act, 1969.


Section 149 allows the employer to deduct the tax at average rate of tax after adjustment of tax credits, un-adjustable WHT and excess or deficient tax. It is suggested that employer is explicitly allowed to adjust excess or refundable tax under section 149(1)(ii) on the basis of return, which is deemed assessment order. Currently, the salaried persons are required to obtain refund order for adjustment of excess tax by employer.

In furtherance, there is no compulsive provision to effectively enforce rule 42(2) of the Income Tax Rules, 2002. In more furtherance, neither the monthly nor the annual statement contains any field whereby the status of employee like resigned; retired etc has to be mentioned. At the same time, there is no effective mechanism whereby an employee, leaving an employment and joining a new one, is obliged to submit his old tax deduction during the part of that year to the new employer. Absence of these might have caused serious revenue implication for the exchequer.

Profit on Debt

Currently, the profit on debt is sometimes paid on daily, weekly, monthly, quarterly, bin-annually or annually according to the changing dynamics of the financial products offered by the financial institutions. Sub-section (1) of section 151 allows the payer of profit to deduct tax after reduction of Zakat.

However, neither the current statement under section 115(4) nor the composite format of Return of Total Income under section 114 and statement under section 115(4) allows such adjustment, hence, needs modification.

In furtherance, currently, the department is challenging payment of profit on loan from Directors/Associates without understanding the fact that provision of section 151 are applicable over instruments in the nature of bonds, certificates, securities or instrument of any kind.

The key to the issue is the word instrument defined in Negotiable Instrument Act that need to be understood in the light of Doctrine of Ejusdem Generis discussed in Jamat e Islami Vs Federation of Pakistan [2000 PLD Supreme Court III] and principles enunciated in CIT v. Orix Leasing Pakistan Ltd [2007 PTR 214 (H.C.Kar.)]. An explanatory circular would suffice in this regard to avoid unnecessary litigation.

Payment to Non-Resident

Apparently, the order of the commissioner under section 152(6) is not appealable, however, provision of sections of section 152(6) used to be made appeal able by invoking section 221. It is suggested that the order should be made appeal able straight without recourse to section 221. In furtherance, sub-section (2) needs to be amended to exclude sub-section (1AA) like sub-section (1A).

Payment for Goods and Services

With the passage of time, section 153 is specifically targeted for amendments since Finance Act, 2002 to Finance Act, 2008. However, Finance Act, 2004 is the only Finance Act that didnt brought any amendment in section 153. Such necessary amendments has made section 153 the most cumbersome to understand among the WHT provisions. This section emerges as the desired candidate for re-phrasing for the sake of simplicity.

Further, astonishingly, the Provincial Government is not listed in the prescribed person obliged to deduct tax under section 153. Moreover, clause (47A) of Part IV of second schedule seems excessive in the presence of sub-section (5) of section 153.

Purchase of Motor Cars and Jeep

An amount of Rupees 16,875 is prescribed for three different categories of cars.

Tax on Motor Vehicles

Income Tax Ordinance, 2001 is applicable over a person, however, section 234 is an exception that levies tax on motor vehicle. For the sake of argument, even if it is levied on the owner of motor vehicle then in the presence of 2% rate of tax under section 153 then it tantamount to double taxation. Harmonization and clarification is required in this regard.

Telephone Users

There is no modus operandi prescribed for claiming advance tax on pre-paid calling cards that are used on PTCL. The tax even does not appear on the face of PTCL bills. FBR should liaise with PTCL in this regard.

Media or Advertising

Advertising is the only transaction, which is mentioned at four different places of the ordinance, that is, section 152, 153, 153A and 233. There is a need to clarify the issue once for all. Moreover, there is a dire need to specify the definition of media.


The list of transaction covered under the Income Tax Ordinance, 2001 is not exhaustive and cannot cater the dynamics of transactions in the modern business world. There is no provision for resident taxpayer comparable to section 152 whereby if a transaction is not covered then it will fall under that section. Consequently, the department makes every effort to categorize such unspecified transactions under the existing WHT provisions. However, the modus operandi of non-categorization, powers of Commissioner of Income Tax and scope of section 161 needs to be enhanced at the same time.


As stated earlier, the list of transaction covered under the Income Tax Ordinance, 2001 is not exhaustive and cannot cater the dynamics of composite transactions in the modern business world. Presently, section 153 encompasses contractual transactions but sometimes the contract contains varied transactions covered under various sections. The law is silent in this regard.


Section 158 of the Income Tax Ordinance, 2001 prescribes the timing of deduction of tax by broadly categorizing the transactions into two types. Tax needs to be deducted on the earlier of payment or credit while for other tax needs to be deducted at the time of payment.

However, recently, explanatory circular number 1 of 2009 has been issued whereby inter account adjustment and netting off debtor and creditor would be a point of time for deduction of tax. This can be understood from the following example.

ABC Limited
Ledger Account

For the year ending June 30, 2009

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