Withholding Agent in Pakistan
Tax is a very complex subject. It takes an immense effort to understand the intricacies of tax laws. In Pakistan taxation, subject of Withholding Agent, is one such instance. Therefore, it is appropriate that we dwell upon the meaning of “Withholding” so that we can understand the concept of withholding Agent with ease.
Meaning of Withholding Agent
As per Merriam-Webster, the word “withhold” means to hold back, to refrain from granting, and to deduct from income when used in context of tax. Cambridge dictionary defines it “to refuse to give something or to keep back something”.
Thus a person who holds back some payment (tax due) while making payment to vendors/suppliers or employees is a withholding agent.
In simple words, a withholding agent is a person who deducts/collects tax while making payment to suppliers/ employees as per law and deposits the collected tax in government treasury.
In the light of above meaning/definition, we can say that only a buyer can withhold tax who is making payment to the vendor/supplier. Its corollary is that a seller (of goods or services) cannot be a withholding agent just for receiving payment for rendering of services or supply of goods.
Whether or Not term "Withholding" defined in Income Tax Ordinance, 2001?
The term “Withholding” or “withhold” has neither been defined in the Income Tax Ordinance (ITO), 2001 nor in the Income Tax Rules 2003. However, we can say that the term “prescribed person” used in section 153(7) of ITO impliedly defines the withholding agent.
It should be noted that a “Directorate-General of Withholding Taxes” does exists in ITO under Section 230-A as well as on ground. However, the term “withholding” does find its place in ITO, 2001 sixty one times (including explanations) in the context of directorate, tax collection/deduction, rate of tax, agent , income tax, obligation of agents and filing statements.
Employer as a Withholding Agent
When an employer, has employees on its payroll, then he can be a withholding agent if he falls in the ambit of certain conditions. For instance, if some of his employees are drawing monthly salary exceeding Rs. 50000, the employer would act as withholding agent. Because he is legally bound to deduct advance income tax from the salary of such employee under section 149 of ITO. Thus, in certain circumstances an employer may be a withholding agent .
Who is a Prescribed Person?
Federal Board of Revenue (FBR), through ITO, calls the withholding agent as prescribed person. “Prescribed person” has been defined in sub-section (7) of section 153. This sub section reads as “prescribed person” means—
- The Federal Government;
- Company;
- An association of persons constituted by, or under law;
- A non-profit organization;
- A foreign contractor or consultant;
- A consortium or joint venture;
- An exporter or an export house for the purpose of subsection (2);
- An association of persons, having turnover of 100,000,000 or above in any of the previous tax years;
- An individual, having turnover of 100,000,000 or above in any of the past tax years;
- A person registered under the Sales Tax Act, 1990 having turnover of 100,000,000 or more in any of the preceding tax years; or
- A person deriving income from the business of construction and sale of residential, commercial or other buildings (builder); or
- A person deriving income from the business of development and sale of residential, commercial or other plots (developer).
What is Turnover?
The term “turn over” means the gross sales or gross receipts. It includes the value of sales tax (ST), federal excise duty (FED), trade discounts and commission reflected on bills, derived from the sale of goods or provision of services. Earlier the turn over threshold was “fifty million” . This limit was enhanced to one hundred million through Finance Act, 2020 effective from 1 July 2021. In this context, FBR issued explanation vide its circular No. 3 of 2020 dated 3 September 2020.
