FTO Wants FBR to Have Access to Bank’s Software for Monitoring of Withholding Taxes

Federal Tax Ombudsman (FTO) has recommended Federal Board of Revenue (FBR) to give access of software of banks to FBR’s field formations for timely monitoring and collection of withholding taxes. The FTO office has conducted a detailed analysis on withholding tax monitoring regime of banks. According to an analysis of banking sector conducted by the FTO, several studies have identified deficiencies and gaps in withholding tax monitoring regime pertaining to the banking sector. The FTO’s report revealed that contrary to the assertion of the department, the strategy employed in respect of withholding taxes is far from being robust. Conducting withholding audit under section 161 of the Income Tax Ordinance, 2001 in cases of all banks for every year, though apparently useful in the short term, cannot be relied upon to deliver in the long term. Detailed audit, by its very nature is conducted in a small number of cases and its purpose is to create credible deterrence rather than revenue generation. Given the sheer number of transactions/entries and voluminous record, it is simply not possible for an officer to scrutinize each and every transaction in view of time constraints and human limitations involved. The solution lies in developing an advanced automated system which should, in the first place, minimize errors/mistakes at the end of users of software and at the same time enable the tax authorities to pinpoint errors efficiently and in real time. This is the need of the hour and consistent with best international practices. The report revealed that a cursory look at the huge amount of demand created and recovered shows that the banks are not discharging their withholding responsibilities properly. Had the banks discharged their responsibilities diligently as they claim, such huge demand would not have been created and subsequently recovered. In one instance, a commercial bank failed to withhold tax under section 151 of the Income Tax ordinance, 2001 on payment amounting to Rs. 471,928,481/- in the case of as many as 57 withholdees. In the case of yet another bank, the bank failed to withhold tax u/s 151 amounting to Rs. 5,344,959,000/- in case of as many as 175 parties and the total default at the rate of 15% came to Rs. 801,135,724/-. This belies the oft-touted claim of the banks that they have a robust, centralized and credible software capable of monitoring withholding taxes under various sections in a foolproof manner. In the case of another bank, the bank failed to deduct tax amounting to Rs. 146,827,195/- @ 15% on payments to fifteen parties on active taxpayers’ list. Similarly the bank failed to deduct tax amounting to Rs. 5,398,298/- @ 30% on payment to as many as 39 parties not on active tax payers’ list. The said discrepancies point to the inadequacies of software employed by the bank as well as issues of comprehension regarding who is a withholdee and which rate of withholding tax is applicable in a particular case. The FTO has recommended FBR to replicate the exercise u/s 161 conducted by LTO Lahore at other field formations holding jurisdiction over the commercial banks in Pakistan so as to plug the gaps in Banks withholding regime. The FBR should conduct a thorough analysis and review of the existing mechanism of withholding tax monitoring and suggest remedial measures for course correction so as to maximize revenue generation. The FBR should explore the possibility of access of software of banks to field formations so that corrective action could be taken is real time. This might entail necessary amendment in law and rules. The FBR should issue clarifications in case of common errors/mistakes detected during withholding audit for the benefit of all the taxpayers, FTO added.