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FBR Declares 34 Banks as SWAPS Agents for Deduction of Withholding Taxes

The Federal Board of Revenue (FBR) has declared 34 banks as “SWAPS” agents (withholding agents) for the deduction and monitoring of withholding taxes.

According to a report of the FBR submitted to the Federal Tax Ombudsman (FTO), 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.

The Withholding Agents (SWAPS agents) are Al Baraka Bank (Pakistan) Limited, Allied Bank Limited, Askari Bank Limited, Bank Al-Falah Limited, Bank Al-Habib Limited, Bank Islamic Pakistan Limited, Bank of China Limited, city Bank, Deutsche Bank AG, Dubai Islamic Bank Limited, Faysal Bank Limited, First Women Bank Limited, Habib Bank Limited, Habib Metropolitan Bank Limited, Industrial and commercial Bank of China, Industrial Development Bank of Pakistan Limited, JS Bank Limited, MCB Bank Limited, MCB Islamic Bank Limited, Meezan Bank Limited, National Bank of Pakistan, Punjab Provincial cooperative Bank Limited, Samba Bank Limited, SILK Bank Limited, Sindh Bank Limited, SME Bank Limited, Soneri Bank Limited, Standard Chartered Bank (Pakistan) Limited, Summit Bank Limited, The Bank of Khyber, The Bank of Punjab, United Bank Limited, Zarai Targiati Bank Limited and State Bank of Pakistan.

The undertaking of new initiatives by the Board on SWAPS and Business Process Re-engineering reinforce the 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 Synchronized Withholding Administration and Payment System (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 payment receipts (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 exemptions 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 the SWAPS portal from the date to be notified by the Board separately.

It is further notified that in the pilot phase of software development and testing only 7 banks out of a total 34 shall be included from 2,3,13,18,21,32 and Stated Bank of Pakistan.

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 solutions as per the FSD will be done in the 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 the pilot testing phase which will start in June/July 2023. This stance is contrary to the timelines given in the notification on the SWAPS agent issued in 2022 wherein it is clearly laid down that the pilot project would be initiated between Oct 2022 and Dec 2022.

The facts shared during the investigation show that there is substantial time runover and the pilot projects had not been initiated yet despite a lapse of over 6 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 the prescribed time frame so that the improved withholding tax monitoring system may be put in place in the shortest possible time to safeguard the 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 the creation of PSID, and automatic checks 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 the next 10 months. However, no basis for such a 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, the initiation of short-term reforms along with the current system of API-based withholding statements will serve as a better strategy for the 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 runover will not only cause leakage of revenue but will also increase the cost of the reforms project, FBR added.

Keeping in view the report of the FBR, the FTO has recommended the FBR that the SWAPS and their components including Functional Specific Documents (FSD) and development of consequential software solutions be completed within a specific time frame instead of keeping it open-ended to avoid time and cost run overs.

The Business Process Re-engineering and linkages with IRIS, ATL, and PSID should be fully integrated from end-to-end without human interface so as to avoid any tampering with and manipulation of data.

The Data Analysis Cell should be established at the Board to analyze and convert voluminous data received from banks 31 No. 002210M/2022 into actionable information and pass the same down to field formations for retrieval of loss of revenue. The audit of banks WHT software and system audit should be regularly conducted to check compliance with the WHT provisions.

The withholding audit under section 161 should be kept separate from the amendment under section 122(5A) to effectively monitor and audit withholding tax deductions. The capacity of the proposed Analysis Cell at FBR HQs should be enhanced in terms of HR and domain expertise to enable them to interpret data matrices, analytics in the light of the legal framework available under tax statutes, and correspondingly capacity of field formations for systemic audit of WHT software be enhanced in terms of HR and technical expertise, FTO added.

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