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ISLAMABAD: The Federal Board of Revenue (FBR) has declared 34 banks as ‘SWAPS’ agents (withholding agents) for the deduction and monitoring of withholding taxes under various provisions of the Income Tax Ordinance, 2001.

A report of the FBR submitted to the Federal Tax Ombudsman (FTO) in the matter of “own motion investigation” revealed that in order to streamline withholding tax collection and deduction mechanism, enabling provision for the placement of a fully automated system by the name ‘Synchronized Withholding Administration and Payment System’ (SWAPS) has been introduced under section 164A of the Income Tax Ordinance.

Banks are required to make deductions of tax on various heads of payments under the Income Tax Ordinance.

WHT system in banking sector: FTO unearths systemic gaps, loopholes

The board also shared information about new initiatives for improving (withholding tax) WHT monitoring and payment system.

As per the FBR’s assertions, the notified SWAPS agent will be integrated with the Board and withholding tax will be deposited in government treasury on real-time basis simultaneously at the time of making third-party payment processed through SWAPS by the SWAPS agent.

It will also result in auto-populated withholding statements, thereby, saving time and reducing cost of compliance for the business, as well as minimising human element; thereby, resulting in meaningful and thorough WHT audit. With the deployment of SWAPS, banks will be liable to deduct and deposit withholding taxes on real-time basis.

With respect to implementation of SWAPS, it is stated by the Board that the Directorate General of Digital Initiatives is currently working on digitalisation of withholding tax regime under the SWAPS.

The report said that the implementation of SWAPS after the approval of Functional Specification Document (FSD) and development of software solution as per the FSD will be done in several phases spanning over next one to two years.

The Board added that the RAAST team of the SBP is currently reviewing the FSD of SWAPS. In the initial phase, expected to start in June/ July 2023 payments under section 153 of Income Tax Ordinance, 2001 will be piloted with three banks. It will be extended to the rest of withholding tax sections after successful run of pilot project, it stated.

Besides the long-term strategy of SWAPS, the short-term strategy was also focused during investigation.

The FBR’s Directorate General of Withholding Taxes along with Information Technology Wing has initiated the task of Business Process Reengineering of Withholding Tax Management.

The FBR has formed a dedicated domain team having expertise in withholding/ advance tax, to analyse, study, find gaps and define/reengineer business processes with reference to withholding tax. This team will further ensure that internet/ computer-based system developed/implemented is driven by real business requirements and is aligned with international best practices, the FBR informed the FTO office.

The undertaking of new initiatives by the Board on SWAPS and Business Process Re-engineering reinforce premise of the instant FTO’s own motion investigation that systemic gaps and loopholes exist in the prevalent withholding tax monitoring and payment mechanism and that integrated, automated response is required to bridge these gaps through strengthening legal and enforcement mechanisms and inducting digital modes and portals in processes and systems for real-time feedback and responses to all the stakeholders particularly the regulator for timely remedial and corrective action.

The FBR report revealed that new initiatives have been taken by the Board to install SWAPS. The board has already issued notification of SWAP agents which are required to deduct and collect tax and credit the same to the concerned commissioner through digital mode. They are also required to generate SWAPS payments recipes (SPR).

To make the system effective, the law envisaged that if the notified SWAP agents failed to integrate with the board within the prescribed time, they would not be eligible for certain tax credits and exemption under any provisions of the Income Tax Ordinance, 2000. However, it has been notified that the above SWAPS agent shall be liable to collect and deposit withholding taxes under all sections except section 151 through SWAPS portal from the date to be notified by the board separately.

It is observed that the main section relating to banks, section 151 has been kept out of this phase for no apparent reasons. Besides, the board has stated in their written comments that the Function Specific Documents (FSD) and Development of software solution as per the FSD will be done in next one to two years and that the RAAST team of FSD is currently reviewing the FSD of SWAPS.

It is also informed that the initial phase for payment under section 153 is at pilot testing phase which will start in June, July 2023. This stance is contrary to the time lines given in the notification on SWAPS agent issued on 2022 wherein it is clearly laid down that the pilot project would be initiated from October 2022 and December 2022.

The facts shared during investigation show that there is substantial time run over and the pilot projects had not been initiated yet despite lapse of over six months. This changing of goalposts and time targets will cause serious hurdles in the way of implementation of this project and, in return, revenue could be continued to suffer leakages and shortfalls.

The department should take notice of these serious lapses and ensure that projects and various phases of implementation thereof are completed within prescribed timeframe so that the improved withholding tax monitoring system may be put in place in the shortest possible time to safeguard rights of all stakeholders.

The FBR report revealed that visible improvements have been planned in withholding tax management which includes inserting system checks and controls at the time of creating PSIDs, verification of rates and ATL status at the time of creation of PSID and automatic check relating to claim of exemptions.

These reforms are in the implementation phase and as per conservative estimate, the same are expected to be implemented in next 10 months.

However, no basis for such time limit has been presented during the hearing. The reforms once implemented, are expected to limit banks discretion of deducting tax at ATL rate from non-ATL persons, as well as, granting incorrect exemption from tax, thereby, protecting stated revenue.

Hence, Initiation of short-term reforms along with current system of API-based withholding statements will serve as better strategy for collection, monitoring and audit of withholding taxes only if the reform process is effectively monitoring for completion of all the tasks within the shortest time frame.

However, any time run over will not only cause leakage of revenue but will also increase cost of the reforms project, the FBR added.

Copyright Business Recorder, 2023


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