Pakistan's tax authority is under mounting pressure to recover more than PKR45.38 billion in unpaid withholding taxes after an audit found widespread non-compliance by more than 1,300 withholding agents, exposing significant weaknesses in tax enforcement and compliance monitoring.
According to the latest report by the Auditor General of Pakistan, 1,344 withholding agents operating under 19 field formations of the Federal Board of Revenue (FBR) failed to deduct withholding tax on payments made to suppliers, contractors and service providers during fiscal years 2022-23 and 2023-24. The audit estimated a tax shortfall of PKR45.388 billion, raising concerns over revenue leakages as Pakistan seeks to strengthen tax collection and improve its fiscal position.
Agents failed to deduct taxes
The audit report said withholding agents were legally required under Section 153, read with Section 161 of the Income Tax Ordinance, 2001, to deduct tax at source from specified payments. Failure to deduct or deposit the tax makes the withholding agent personally liable for the unpaid amount through legal proceedings initiated by the Commissioner Inland Revenue.
The audit observations were communicated to the relevant authorities between February and November 2024.
Recovery progress remains limited
In its response to auditors, the FBR said it had recovered only PKR2.41 million of the outstanding amount, while legal proceedings had been initiated to recover the remaining PKR45.386 billion. The authority said the cases remain pending adjudication.
The limited recovery highlights delays in enforcement and raises questions about the effectiveness of the country's withholding tax administration, according to the audit report.
DAC directs faster action
The report said the Departmental Accounts Committee (DAC) reviewed the audit observations during meetings held between July 2024 and January 2025 and directed the FBR to expedite legal proceedings and submit compliance reports to both audit authorities and tax administration officials.
However, auditors noted that no significant progress had been reported before the audit was finalized.
Auditors call for stronger enforcement
The Auditor General recommended that the FBR immediately conclude pending legal proceedings and strengthen enforcement through Commissioners Inland Revenue responsible for withholding tax administration.
The report also urged the implementation of the Synchronized Withholding Administration and Payment System (SWAPS) to improve monitoring, compliance and tax collection. Auditors said regular system reviews and technological upgrades could help identify weaknesses and curb future revenue leakages.
Withholding tax is one of Pakistan's largest sources of tax revenue, enabling the government to collect taxes directly at the source of transactions. Tax experts say stricter enforcement, enhanced digital monitoring and timely legal action are essential to improving compliance and broadening the tax base.
Recovering more than PKR45 billion in unpaid taxes could provide a significant boost to government revenues as Pakistan seeks to strengthen fiscal discipline and meet ambitious revenue targets. Analysts say the outcome of the recovery efforts will be an important test of the FBR's ability to improve tax administration and plug revenue leakages.
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