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ISLAMABAD: The Federal Cabinet has exempted Pakistan Railways' business partners from 10 percent Withholding Tax of total bid money after private sector expressed no trust in the FBR's refund mechanism and termed it non-transparent , official sources told Business Recorder.

The Ministry of Railways, sources said, in its case presented before the Cabinet last week argued that it is encouraging private sector participation in Railways under the reforms plan approved by the Cabinet. One of the major initiatives of the Ministry of Railways is to engage private sector in all areas including commercial management of trains, outsourcing of freight trains and track rehabilitation.

In accordance with Section 236-A of the Income Tax Ordinance 2001 Pakistan Railways, being withholding tax (WHT) agent, has to recover WHT @10% of the total bid money with first installment. Under the law, it is treated as advance income tax adjustable against final tax liability of the private parties.

Ministry of Railways argued that private parties have been agitating that advance payment of WHT @ 10% of total bid money is very high as compared to their actual annual income tax liability and it adversely impacts on the requisite liquidity requirement for successful operation of the outsourced railway services. Private parties have serious concerns about the refund mechanisms at FBR. Resultantly, WHT has become one of the major impeding factors in private sector participation in Railways.

The sources said, Ministry of Railways which is hardly finding business partners took the stance that FBR must understand that if Railways carries out these operations itself FBR gets zero tax on Railways revenue, which is exempted from tax.

The Ministry further stated that in case of outsourcing its business to private sector, there will be substantial contribution to the national exchequer in the form of taxes. In FY2020-21, in first 3 quarters, Railways contributed tens of millions as tax collection from its private partners. As per law, withholding tax is applicable on the profit and not the total revenue. WHT charged on the total bid amount offered by the private party is not justified. It is hindering the process of outsourcing of train operations and other services by Pakistan Railways.

"The engagement of private parties through outsourcing of commercial management of trains is imperative for fetching more revenue, which, in turn, would reduce losses and would be a positive step towards self-sustainability," the sources said adding that “the private sector stresses that getting refund of advance tax is extremely cumbersome process and lacks transparency," the sources continued.

Ministry of Railways, in its proposed recommended that collection of [email protected] 10 percent upfront in case of Railways may be exempted and the private companies may be allowed to make tax adjustments at the time of filing of annual returns, adding that FBR may be requested to issue SRO to implement this proposal.

FBR wanted no change in WHT collection mechanism, at least for current fiscal year but Cabinet did not agree and went with the arguments of Pakistan Railways and decided to exempt Railways business partners from 10 per cent advance WHT on bid money.

Copyright Business Recorder, 2021