"The real reason for withholding taxes is the unwillingness of workers to share their incomes with the government and the consequent difficulties of collection. To overcome this handicap, the government has simply impressed employers into its service as involuntary and unpaid tax collectors"— Frank Chodorov, The Income Tax: Root of All Evil
Professionals, bankers, traders, factory owners, farmers, technicians, and, in fact, all who are engaged in some form of service or occupation have a lot going on in their lives. They have a multitude of chores to be compulsorily performed to eke out a respectable living.
One does not have to be a genius to realise that any distraction or miscalculation can cause heavy losses, and it has been observed that those who focus primarily on their trade tend to prosper more compared to the callous ones. Understandably, the more income people earn would be directly proportional to the taxes they pay. Sensibility demands that the general population should be given freedom and facilities to enhance their earning power.
Pakistan's income tax law principally envisages taxes to be paid annually after determining the correct quantum of income earned and the tax liability incurred during the fiscal year (from July 1 of one year to June 30 of the subsequent year in Pakistan). Thus, a citizen can concentrate on his work for a full 12 months, generate enough finances to meet his ends and contribute towards the exchequer as part of his constitutional obligation. In other words, the ideal situation would stipulate that till a person files his return of income, he should not be worried about paying this tax in any form, rather focus his energies on increasing and improving economic activities. Such efforts would yield better results in the form of higher profits and, thus, better tax revenues for the government.
Businesses can have their ups and downs, and there is no one formula for every category; therefore, expecting that they would perform consistently year in and year out is quite naïve. Anyway, Pakistani tax authorities appear oblivious to ground realities, and hence, they tend to consider that taxpayers make much more money than what they actually declare. Using this as a premise, their attitude and approach become extremely anti-people, and they propose amendments in laws whereby they hope to tighten the noose around the taxpayers' necks. Such behaviour also raises a lot of questions.
But before we throw the entire revenue department under the bus, we must acknowledge that we live in a very complicated world where matters are not as simple as we would like them to be. Here, in our beloved country, there are people with delinquent characteristics who are prone to defying the law. Since they belong to the privileged class and get away with their intransigence most of the time, they consider mocking the law of the land a source of great pride and honour.
The stress is now on advance taxes and an arduous scheme of withholding taxes spanning over almost 60 (reduced from 80 a couple of years back) unique provisions
Quite naturally, following in their footsteps are the ones who try to mimic their wayward life-style, thinking it to be exemplary. Under the dark shadows of these treacherous few and their indolent followers, the ones who are hard hit are the law-abiding patriotic citizens of the country. They have to suffer the consequences of others' wrongdoings and bear the brunt of their sins. Hence, where the law is specifically formulated to check such unruly elements, the ones actually grilled are those who have all along been sincerely observing the rules.
Rather than taxing real income, over time, the Income Tax Ordinance 2001, has mostly shifted to taxes of a fixed, transactional, presumptive, minimum etc. nature. Therefore, stress is now on advance taxes and an arduous scheme of withholding taxes spanning over almost 60 (reduced from 80 a couple of years back) unique provisions. As a result, the responsibility of revenue authorities regarding tax collection has now fallen on the shoulders of withholding tax agents who, in addition to their work, are forced to deduct and collect tax when making or receiving payments.
In the corporate sector, this involves an exclusive department with its own set of employees and other infrastructure, which eventually reduces overall business profits and dividends. Of course, any laxity or default by the agent in the course of this 'bonded labour' is subjected to penalties, default surcharges, and possibly even prosecution.
While sympathising with withholding tax agents, Justice (retired) Nasim Sikander in CIT Companies, Lahore v State Cement of Corporation (Pvt) Ltd, Lahore 2002 PTD 1603 made the following remarks:
"This phenomenon in fact is a recent development in tax regimes that persons who are otherwise neither employed by the State nor they represent it in any manner are designated to collect Revenue of the State without any ostensible reward."
Where withholding taxes, in some sectors, might be beneficial as they reduce the ultimate liability, in a majority, they are nothing more than a cumbersome exercise. The truth is that excessive dependence on withholding taxes discourages people from filing their returns on the assumption that since they have already paid 'sufficient' tax, they do not feel it is necessary to submit a return of income. Frequent amendments in tax laws have mutilated its real scope, causing the government to suffer revenue losses. Ironically, the imprudent methods adopted to increase revenue have undoubtedly eroded the real tax potential of this country, forcing its people into a debt trap that is gnawing at the roots of its economy.
If we need to prosper and overcome our debt woes, we must resort to simpler ways of collecting taxes, and adopt a system based on Adam Smith's four principles of fairness, certainty, convenience and efficiency. Paying withholding taxes with the consequence that some are full and final, some minimum and some adjustable, means that other than adjustable taxes, some of them are definitely confiscatory in nature, a sure-shot formula to prevent broadening the tax base.