Editorial
The Auditor General of Pakistan (AGP) discovered that the Federal Board of Revenue (FBR) misclassified withholding taxes from the sales tax mode as direct taxes when in fact, they are indirect taxes that disproportionately impact the poor. These withholding taxes, which are actually a form of indirect tax, made up 57 percent of total direct taxes credited, with a significant portion falling under the minimum or final tax regimen.
The report suggests that the FBR intentionally misrepresented indirect taxes as direct taxes to create the appearance of a fair tax structure based on the ability to pay principle. Furthermore, the reliance on withholding taxes in the indirect tax mode is increasing, as evidenced by the substantial collection of 1.22 trillion rupees in withholding tax in the fiscal year 2022-23, representing a significant increase from the previous year. This reliance on withholding taxes is attributed to the ease of collection by withholding agents at the point of purchase.
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Critics argue that the inclusion of withholding taxes collected in the sales tax mode under direct taxes in budget documents, instead of listing them separately, may indicate an intent to mislead rather than an oversight.
The AGP report also highlighted the implementation of contingency measures, such as raising withholding taxes on items like cigarettes and sugary drinks, which affect the income of vulnerable or lower-income households.
The delay in levying a tax on farm income by provincial governments, as agreed with the IMF, is concerning, as it would help mitigate the impact of withholding taxes levied in the sales tax mode. Additionally, it is important for the federal government to consider levying taxes on the income of individuals in the real estate sector and builders, and to avoid extending fiscal and monetary incentives to certain sectors that necessitate reliance on indirect taxes. These indirect taxes contribute to the decline in the quality of life for the general public and are linked to the high levels of poverty in the country.
