Massive misuse of WHT regime by non-resident companies

RECORDER REPORT

ISLAMABAD: Directorate General of Intelligence and Investigation Inland Revenue (IR) Federal Board of Revenue has unearthed massive misuse of withholding tax regime by non-resident companies, causing great revenue loss to the national exchequer.

Sources told Business Recorder here on Tuesday that the directorate of intelligence IR has underlined huge gap between the withholding tax payable on payments made for supply of goods/services and actual withholding tax collection by non-resident companies.

In this regard, the DG I&I IR forwarded a case of the non-resident company to Sajjad Ali Chief Commissioner, Large Taxpayer Unit (LTU) Islamabad.

Sources said that Directorate General I&I-IR continuously monitors the patterns of tax evasion in Inland Revenue. This monitoring is not confined to mere whistle blowing, rather after conducting initial investigations solid cases are referred to the concerned field formations for further necessary action. Recently, while analyzing the data of withholding tax collected and deposited by non-resident companies operating in Pakistan, the agency has detected huge gap between the withholding tax payable and actual withholding tax collection as evident from their annual statements and computerized payment receipt (CPR) data available on Integrated Tax Management System (ITMS). The issue needs to be seen in the context of continuous losses reported by non-resident companies resulting in ‘Nil’ tax payments under section 137 of the Income Tax Ordinance, 2001 on year to year basis.

As a sample, the directorate of intelligence IR has examined the data of withholding tax collected by a Chinese company vis-à-vis its payments as reflected in its returned version. The profit and loss (P&L) account of the said company for tax year 2010 reflects the major payments under various heads which are liable to tax deduction unless proved to be exempt by the withholding agent.

The actual withholding tax paid for tax year 2010 under section 153 amount to Rs.2,062,795.00  and covers total payments of Rs.52.559 million only as per its withholding statement filed under section 165 of the Income Tax Ordinance, 2001. There is no evidence of withholding tax payment under section 149 and 152 (tax deduction on salary/payments to non residents) of the Income Tax Ordinance, 2001. In this case of non-resident company, the total withholding tax liable to be withheld was Rs. 168,357,266.12; less tax withheld/paid Rs. 2,062,795.00 and balance tax payable/recoverable is Rs 166,294,471.12.

The analysis/findings are based on agency’s initial intelligence exercise which revealed that withholding tax Audit of the said taxpayer was initiated by RTO, Peshawar for Tax Year under consideration but could not be completed due to transfer of the case to LTU, Islamabad. However, information gathered from the computers of the Withholding Tax Officer revealed that there were some major discrepancies regarding withholding tax obligation of the taxpayer.

The tax department has detected discrepancies in purchase of steel and cement identified on the basis of information collected from the suppliers. The taxpayer has failed to fulfill its withholding obligations and as a result massive loss of revenue has been caused, which needs to be retrieved. The directorate of intelligence IR has asked the LTU Islamabad to conduct withholding audit of the company for the said year along with succeeding years as well.