Salaried Class Tax Hike Fuels Withholding Tax Growth In FY2023-24: AGP

The Auditor General of Pakistan (AGP) has attributed a significant rise in withholding tax receipts during FY2023-24 primarily to higher tax rates applied to the salaried class, according to the AGP’s 2024-25 report on Inland Revenue and Customs. Withholding taxes contributed Rs. 2,740.10 billion to collections in FY24, accounting for 60.47% of the total direct tax take of Rs. 4,530.70 billion. The AGP noted that the regime’s reliance on at-source deduction through withholding agents makes it administratively efficient and a dominant component of direct taxation. The report highlighted that among the 10 major withholding streams, levies on contractual receipts, exports, bank interest, and other items fall under minimum or final tax regimes. The audit observed that these heads are economically akin to indirect taxation but are recorded by FBR as direct taxes. It further pointed out that while withholding on telephone bills and property purchases is adjustable, many non-filers do not claim these adjustments. During FY24, the FBR collected Rs. 1,650.75 billion under key withholding heads, an increase of Rs. 429.69 billion over the previous year. The AGP said the jump was “mainly attributable to an increase in salary rates,” underscoring the outsized role of payroll taxation in last year’s performance. The AGP reiterated that the withholding framework hinges on the payer’s compliance as a designated agent, which reduces leakage and improves cash flows to the exchequer. However, the classification of certain final/minimum taxes as “direct” continues to blur the line between direct and indirect tax burdens, the audit observed. The report also referenced administrative challenges, noting that adjustable withholdings are often left unclaimed by non-filers, which suggests gaps in taxpayer education, return filing, and enforcement. The findings come as the FBR continues to lean on withholding mechanisms to meet targets, even as policymakers debate the need to rebalance the tax mix, widen the base, and improve voluntary compliance, particularly among non-filers who forgo adjustments they are legally entitled to claim.