sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing | GST - Goods and Services Tax
Latest Expert Exchange
Direct Tax »
 CBDT lays down rules for concessional rate
 How can you minimise tax deduction and maximise take-home salary?
 Direct tax collection exceeds target in FY18
 Taking the 1st five steps to saving taxes Income Tax
 TDS on interest income: Want to avoid? Here’s how you can do this
 CBDT to modify advance ruling forms for transparency in cross-border deals
 New ITR forms for 2018-19 notified by CBDT
 Income Tax Return form: There are many changes you need to know
 Procedure For Registration And Submission Of Statement Of Financial Transactions (Sft) As Per Section 285ba Of Income-Tax Act, 1961 Read With Rule 114e Of Income-Tax Rules, 1962
 Income tax return forms for FY 2017-18 released
 10 benefits of filing ITR even if you are below taxable bracket

Non-adjustable withholding tax
December, 31st 2013

Direct taxation is considered an important fiscal instrument for spurring economic growth and redistribution of resources across different strata of society. However, it is abundantly clear that direct taxation has failed to achieve this goal so far.

There are several reasons for the failure of direct taxation in effective redistribution of resources, despite a significant rise in direct tax revenues.

Income tax is the only major direct tax levy and the share of income tax (corporate and individual) in total tax revenues has increased from about 20 per cent in 1991-92 to about 38 per cent in 2011-12. The average growth of income tax revenue was nearly 20 per cent over that period.

Looking at the three modes of income tax collection, more than 55 per cent of income tax is collected through a withholding mechanism. Of the total withholding tax collection, about 97 per cent comes from contracts, imports, salaries, telephone, exports, securities, electricity bills, dividends, cash withdrawal, surcharge, commission, transport etc.

Withholding tax collection is also an important source of direct tax revenues in advanced economies. For instance, about 27 per cent of the income tax was collected through this mode in Japan during 2012-13.

However, there is a big difference in the operational methodology of withholding tax in Pakistan and advanced economies. Withholding taxes in advanced economies are largely allowed to be adjusted against the gross tax liability at the time of filing tax returns, or taxpayers have the option to treat withheld taxes as final or adjustable for their convenience.

In sharp contrast, a majority of withholding tax cases here, final discharge of tax liability and taxpayers are not allowed to adjust against their gross tax liability. Non-adjustability of withholding taxes gives the spirit of indirect taxation, weakening the redistributive power of direct taxation.

There is huge tax evasion as measured by the tax gap, which also reduces the redistribution power of direct taxation. For instance, the direct tax gap was estimated to be around 143 per cent of actual direct tax revenues of Rs183.1 billion in 2004-05. In another study, the tax gap was estimated to be 97 per cent of actual receipts of salaried taxpayers, and 15 per cent of actual receipts of non-salaried taxpayers. This amounts to a tax gap of 27 per cent of individual tax revenues and three per cent of federal tax revenues in 2007-08. Likewise, the corporate tax gap was estimated to be about 218 per cent of the actual corporate income tax payments for 2007-08.

The informal economy is another factor that is weakening the redistribution power of direct taxation. The size of this economy was estimated to be 30 per cent of the total size of the economy in 2009-10. As long as the money continues changing hands in the informal economy, fiscal policy would largely remain ineffective in redistribution of income.

A long list of exemptions in the income tax law also favours wealthy people. Taxation of agricultural income is virtually exempted. About Rs70 billion in income tax revenue was lost due to various exemptions on account of income tax during 2011-12. The government provided subsidy to the tune of about four per cent of GDP during 2007-08, largely to the power sector, but the country is unable to cope with the electricity shortage.

Last but not the least, there is no levy on inheritance, wealth or gifts in the country. The absence of such a levy has certainly aggravated the problem of income inequality. As long as there is no inheritance tax, a few big landlords and wealthy people would continue to see their wealth blooming.

In advanced economies, inherence tax collection is sizeable. For instance, in Japan, inheritance tax revenue was 3.5 per cent to total tax collection during 2012-13.

Home | About Us | Terms and Conditions | Contact Us
Copyright 2018 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Binarysoft Technologies - We Bring IT. Offshore software outsourcing company. We use Global Delivery Model (GDM) and believe in Follow The Sun principle

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions