Navigating the Notice for Non-Filing of Withholding Statement: Section 165 Compliance in Pakistan

Why This Matters Now: The Urgency of Withholding Statement Compliance

In Pakistan's dynamic business landscape, timely and accurate compliance with tax regulations is not merely a legal obligation but a cornerstone of financial integrity and operational sustainability. One area that frequently poses challenges, leading to significant penalties if overlooked, is the filing of withholding statements. Specifically, Section 165 of the Income Tax Ordinance, 2001, mandates the submission of these statements. A 'Notice for Non-Filing of Withholding Statement' from the Federal Board of Revenue (FBR) can be a stark reminder of this critical compliance requirement. For business owners, tax professionals, and corporate decision-makers in Pakistan, understanding the implications of this notice, the underlying legal provisions, and the steps to rectify non-compliance is paramount. This article aims to demystify Section 165, elucidate the consequences of its contravention, and provide actionable guidance to ensure your business remains compliant.

Understanding Section 165 of the Income Tax Ordinance, 2001

Section 165 of the Income Tax Ordinance, 2001, deals with the 'statement of deduction of tax'. In essence, it requires any person responsible for deducting tax at source (withholding tax) to furnish an annual statement in the prescribed form, detailing the tax deducted, payments made, and other relevant particulars. This statement serves as a crucial reporting mechanism for the FBR, allowing it to track tax collections at source and reconcile them with tax liabilities of recipients.

Who is Responsible for Filing?

The responsibility falls upon any person who is required to deduct tax at source under any provision of the Income Tax Ordinance, 2001. This broadly includes:

• Companies
• Partnerships (registered firms and AOPs)
• Government departments and agencies
• Any other entity or individual mandated by law to withhold tax.

This encompasses a vast array of transactions, from salaries and professional fees to rent, interest, and payments to contractors and suppliers.

What Information is Required?

The withholding statement (often referred to as Statement of Deducted Tax or Form A) typically requires details such as:

• Name, address, and National Tax Number (NTN) of the deductor.
• Name, address, and NTN of the deductee (the person from whom tax was deducted).
• The nature of payment.
• The gross amount of payment.
• The amount of tax deducted.
• The date of deduction and payment of tax to the government.
• Tax deposit challan numbers.

The Notice for Non-Filing: What It Means and Why It's Issued

A 'Notice for Non-Filing of Withholding Statement' is an official communication from the FBR indicating that the tax authority has not received the mandatory annual statement required under Section 165 for a specific tax year. This notice is typically issued after the due date for filing has passed without the statement being submitted.

Common Reasons for Non-Filing

• Oversight or Administrative Error: Simple human error, lack of awareness of the filing requirement, or misplacement of documents.
• Lack of Internal Controls: Insufficient processes to track and ensure timely submission of all tax-related filings.
• Misinterpretation of Obligations: Belief that tax was not deductible, or that a particular payment was exempt, without proper due diligence or consultation.
• Data Incompleteness: Difficulty in gathering all necessary information from various departments or third parties.
• Change in Business Operations: New types of payments or suppliers that trigger withholding obligations may be overlooked.

Consequences of Non-Filing: Penalties and Interest

Non-compliance with Section 165 carries significant financial implications. The Income Tax Ordinance, 2001, prescribes penalties for failure to file the withholding statement by the due date.

Section 205 of the Income Tax Ordinance, 2001 outlines penalties for failure to furnish statements. While specific amounts can be subject to amendments and departmental discretion, commonly encountered penalties include:

• For Companies: A penalty of PKR 25,000 per annum.
• For Persons other than Companies: A penalty of PKR 10,000 per annum.

Additionally, interest may be levied under Section 203 for delayed payment of tax, which indirectly relates to the accuracy and timeliness of the withheld amounts reported in the statement.

Example: A private limited company in Karachi failed to file its annual withholding statement for FY 2023-24. If the FBR issues a notice and imposes the penalty under Section 205, the company could face a penalty of PKR 25,000 for that tax year. If this oversight continues for multiple years, the penalties accumulate significantly.

Responding to a Notice for Non-Filing: A Step-by-Step Guide

Receiving a notice can be stressful, but a proactive and structured approach can mitigate the damage.

Step 1: Acknowledge and Review the Notice

Do not ignore the notice. Carefully read the notice, identify the tax year(s) for which the filing is overdue, and the specific section of the law cited. Note any deadlines for response or rectification mentioned in the notice.

Step 2: Internal Investigation and Information Gathering

Conduct a thorough internal review to ascertain why the statement was not filed.

• Identify Withholding Obligations: Review all payments made during the relevant tax year to identify instances where tax should have been withheld under the Income Tax Ordinance, 2001. Consult the relevant sections of the Ordinance (e.g., Section 153 for payments to contractors and suppliers, Section 154 for payments to non-residents, etc.).
• Gather Supporting Documents: Collect all relevant payment records, tax deduction certificates (if issued), tax deposit challans, and any correspondence related to these transactions.

Step 3: Consult a Tax Professional

It is highly advisable to engage a qualified tax advisor, Chartered Accountant, or tax lawyer at this stage. They can help:

• Interpret the notice and tax laws accurately.
• Determine the precise extent of non-compliance.
• Assist in preparing the overdue statement.
• Represent your business before the FBR.

Step 4: Prepare and File the Overdue Statement(s)

With the help of your tax advisor, prepare the withholding statement(s) accurately. This typically involves:

1. Obtain Login Credentials: Ensure you have access to the FBR's Iris portal for electronic filing.
2. Select Correct Form: Choose the appropriate withholding statement form on Iris.
3. Populate Data: Accurately enter all required details regarding deductions, payments, and tax deposits.
4. Attach Supporting Documents: If required or beneficial, attach relevant documents.
5. Submit Electronically: File the statement(s) through the Iris portal.

Step 5: Pay Penalties and Interest

Once the overdue statements are filed, you will need to pay the prescribed penalties under Section 205. If there was a delay in depositing the withheld tax, interest under Section 203 may also be applicable.

• Generate Payment Challan: Create the relevant tax payment challan (e.g., IT-312) for penalties and interest.
• Deposit Payment: Deposit the challan at an authorized bank.
• Report Payment: Ensure this payment is reflected in your tax records and, if necessary, communicated to the FBR.

Step 6: Respond to the FBR

Submit a formal response to the notice, attaching copies of the filed overdue statements and proof of penalty payments. This demonstrates your commitment to rectifying the non-compliance. Your tax professional will guide you on the format and content of this response.

Preventing Future Non-Filing: Best Practices for Businesses

The best way to deal with a notice for non-filing is to prevent it from occurring. Implementing robust internal controls and fostering a culture of compliance is key.

1. Establish a Dedicated Compliance Function

Assign responsibility for tax compliance, including withholding statements, to a specific department or individual within your organization. For larger companies, this might be a tax department; for smaller businesses, it could be the accountant or a designated administrative staff member.

2. Maintain an Up-to-Date Payment Register

Keep a detailed record of all payments made, categorizing them by nature (e.g., salary, professional fees, rent, services). This register should highlight payments that are subject to withholding tax.

3. Utilize Tax Calendar and Reminders

Develop an internal tax calendar that lists all due dates for tax filings, including the annual withholding statement. Set up automated reminders to ensure deadlines are not missed.

4. Conduct Regular Training

Ensure that the personnel responsible for financial operations and payments are aware of the withholding tax obligations under the Income Tax Ordinance, 2001. Regular training sessions can keep them updated on any changes in the law.

5. Perform Periodic Internal Audits

Conduct internal reviews of withholding tax compliance on a quarterly or semi-annual basis. This can help identify any errors or omissions before they become material.

6. Document Everything

Maintain comprehensive documentation for all withholding tax calculations, deductions, payments to the government, and the filing of statements. This documentation is crucial for audits and in case of any queries from the tax authorities.

7. Engage Professional Support Proactively

Don't wait for a notice. Regularly consult with tax professionals to ensure your company's withholding tax practices are in line with current legislation and best practices.

Common Pitfalls and How to Avoid Them

Pitfall: Assuming no tax is deductible if no certificate is provided by the payee.

Real-World Scenario: A manufacturing company paid a large sum to a local supplier for raw materials. The supplier did not provide a tax exemption certificate. The company assumed no withholding was required because it didn't have a formal 'tax exemption' document from the supplier. However, Section 153 of the Ordinance mandates withholding on payments to contractors and suppliers above a certain threshold, irrespective of whether an exemption certificate is provided. The company later received a notice for non-filing and faced penalties, including potential interest on the un-withheld tax.

Avoidance: Understand the mandatory withholding thresholds and categories of payments under Section 153. If in doubt, always err on the side of caution and consult your tax advisor.

Pitfall: Forgetting about payments to non-residents.

Real-World Scenario: A software company in Pakistan made payments to a foreign vendor for cloud services. They overlooked the withholding tax provisions under Section 154, which apply to payments to non-residents for technical services or royalties, among others. The withholding statement did not reflect these payments, leading to a notice.

Avoidance: Be vigilant about all payments made outside Pakistan, especially for services, royalties, technical fees, or royalties. Section 154 has specific rates and conditions.

Pitfall: Delaying the filing until the last minute.

Real-World Scenario: A retail business owner decided to file their withholding statement a few days after the due date. During the filing process, they encountered technical issues with the Iris portal, which were exacerbated by the last-minute rush. This led to further delays and missed deadlines, increasing the likelihood of FBR intervention.

Avoidance: Aim to file your withholding statements at least a week before the due date to account for unforeseen technical glitches or information gaps.

Impact of Compliance and Non-Compliance: A Before and After Scenario

Scenario: Non-Compliance

Company: "Global Innovations Pvt. Ltd." Tax Year: FY 2023-24 Issue: Failed to file annual withholding statement due to oversight. FBR Action: Issued Notice for Non-Filing. Outcome:

• Penalty under Section 205: PKR 25,000.
• Additional time and resources spent by finance team to rectify.
• Potential scrutiny of other tax filings.
• Reputational impact if disputes escalate.

Scenario: Compliance

Company: "Global Innovations Pvt. Ltd." Tax Year: FY 2023-24 Action: Proactively filed the annual withholding statement by the due date (e.g., July 31st for the tax year ending June 30th). Outcome:

• No penalties incurred.
• Smooth financial operations maintained.
• FBR records are up-to-date and accurate.
• Reduced risk of audits and investigations.
• Positive compliance history.

Regulatory Updates and Future Considerations

The FBR periodically issues circulars, notifications, and SROs that may impact withholding tax procedures and reporting requirements. It is essential to stay abreast of these changes. For instance, amendments to the Finance Act can alter withholding rates or introduce new categories of payments subject to withholding.

Example: The Finance Act 2023 introduced certain changes to withholding tax provisions. Businesses must ensure their understanding and application of these changes are reflected in their withholding statements.

Action Item: Regularly check the FBR's official website ([https://www.fbr.gov.pk/](https://www.fbr.gov.pk/)) for updates and consult with your tax advisor regarding recent legislative changes.

Key Takeaways

• Section 165 of the Income Tax Ordinance, 2001, mandates the filing of an annual withholding statement.
• Failure to file can result in substantial penalties (PKR 25,000 for companies, PKR 10,000 for others, per annum) and potentially interest.
• A proactive approach, including internal controls, regular reviews, and professional consultation, is crucial for preventing non-compliance.
• Responding effectively to an FBR notice involves thorough investigation, accurate filing of overdue statements, payment of penalties, and formal communication with the FBR.

Frequently Asked Questions (FAQs)

Q1: What is the due date for filing the annual withholding statement in Pakistan?

The due date for filing the annual withholding statement is generally the 31st day of July following the end of the financial year (i.e., July 31st for the tax year ending June 30th).

Q2: Can I get an extension for filing the withholding statement?

While the Ordinance does not explicitly provide for extensions for this specific statement, in exceptional circumstances, you may request an extension from the Commissioner Inland Revenue. However, it is best practice to file by the due date and proactively address any potential delays.

Q3: What if I incorrectly calculated or withheld the tax?

If you discover an error in withholding tax calculations or amounts, you should rectify it as soon as possible. This might involve adjusting future withholdings or making a supplementary payment to the FBR. You should also disclose this correction in your overdue withholding statement, if applicable, and be prepared to explain the discrepancy to the tax authorities. Engaging a tax professional is highly recommended in such cases.

Disclaimer: This article provides general guidance and is not a substitute for professional tax advice. Tax laws are subject to change and interpretation. Businesses should consult with qualified tax professionals for advice specific to their circumstances.