The Federal Board of Revenue (FBR) does not have a watertight procedure in place to ensure that a 7.5 percent withholding tax on electricity bills over Rs. 25,000 per month is not imposed to income tax return filers.
In this aspect, there is no coordination between the FBR and the electricity distribution firms.
Collection of Taxes by FBR on Electricity Bills Since 2021
The FBR collected withholding tax (under section 235 of the Income Tax Ordinance) of Rs. 71.412 billion on energy bills in 2021-22, compared to Rs 51.264 million in 2020-21, a 39.3 percent increase.
Withholding tax collection under section 235 of the Income Tax Ordinance was Rs. 53.719 billion in the first half of 2022-23, compared to Rs. 32.637 billion in the same period of 2021-22, representing a 64.6 percent increase.
Previous WHT Threshold
According to tax experts, the FBR reduced the monthly electricity bill threshold for withholding tax (WHT) on electricity use from Rs. 75,000 to Rs. 25,000 for home customers who are not on the Active Taxpayers’ List beginning July 1, 2021.
Many household users in the country do not have a job or a business and hence do not file returns, yet their costs in the summer reach Rs. 25,000 per month due to the use of air conditioners.
At first glance, the lowering in the threshold from Rs. 75,000 to Rs. 25,000 per month appears commendable, as individuals paying high utility bills should be completing their tax returns, and if they are not, they must pay the penalty in the form of this WHT.
Flaws in FBR’s Tax Collection System on Electricity Bills
However, a thorough examination showed significant flaws in the decision. For starters, in many situations, the electricity connections are not in the names of the people who live in the houses.
In the case of rental houses and apartments, the connection is in the name of the landlord, but the renter is responsible for paying the payment.
Similarly, even in the case of self-occupied inherited properties, the link is in the name of the current resident’s father or grandfather.
The residence may be a tax filer, but the connection may be in the name of someone who is not on the Active Taxpayers List, and the resident will be subject to the withholding tax.
DISCOs Failure
DISCOs have failed to launch a large-scale campaign to ensure that power connections are transferred in the names of actual people.
Even yet, it is conceivable that the intended results will not be obtained since no landlord will consent to the transfer of his energy connection in the name of the renter. This will result in unneeded hardship for current taxpayers.
To read our blog on “FBR suing Faysal Bank in the High Court over a tax dispute,” click here.