The Federal Board of Revenue has proposed a one percent increase in withholding tax rates, effective October 1, 2024, depending on the agency’s performance in meeting its revenue targets for September.
According to sources, this proposal is a contingency plan to address potential shortfalls in tax collection for the first quarter of the fiscal year 2024-25, which spans from July to September.
If the FBR fails to meet its tax collection targets for September, the proposed increase will be implemented through a supplementary Finance Bill.
The decision now hinges on whether tax collectors can achieve their targets by the end of the month. If they fall short, the withholding tax rates could rise in October.
In the fiscal year 2023-24, withholding taxes, collected primarily through sales tax, represented over 70% of total direct tax revenue.
While the standard sales tax rate might remain unchanged, the FBR is considering a 1% increase in withholding tax rates if revenue shortfalls persist.
So far, the FBR has experienced a significant shortfall of Rs 98 billion in tax collections during the first two months of the 2024-25 fiscal year, with net collections totaling Rs 1,456 billion against a target of Rs 1,554 billion.
The agency is projected to face a near Rs 100 billion shortfall in September, driven by declines in import taxes and other factors. The growth rate for domestic taxes, initially anticipated at 18%, may be adjusted to 11% in the coming months due to reduced import levels.
Sources suggest that despite efforts to address the shortfall, including criticisms and threats of suspensions or transfers of senior tax officials, these measures have not effectively improved tax collection.
An urgent strategy focusing on digitization, including the use of the “SWAPS” system for monitoring withholding taxes and addressing illegal sales tax adjustments through data analysis by PRAL, is deemed necessary to enhance tax collection efficiency.
