ISLAMABAD: The Federal Board of Revenue (FBR) lacks a foolproof mechanism to guarantee that individuals who file income tax returns are not subject to a 7.5 percent withholding tax on electricity bills exceeding Rs. 25,000 per month.

In the fiscal year 2021-22, the FBR collected Rs. 71.412 billion in withholding tax (under section 235 of the Income Tax Ordinance) on electricity bills, a significant increase of 39.3 percent compared to the Rs. 51.264 billion collected in 2020-21.

For the first half (July-December) of the fiscal year 2022-23, the withholding tax collection under section 235 of the Income Tax Ordinance reached Rs. 53.719 billion, marking a substantial rise of 64.6 percent from the Rs. 32.637 billion collected during the same period in 2021-22.

Tax experts have pointed out that the FBR reduced the threshold for withholding tax (WHT) on electricity bills from Rs. 75,000 to Rs. 25,000 per month for domestic users not listed on the Active Taxpayers’ List, effective from July 1, 2021.

Many domestic consumers across the nation lack formal employment or businesses and therefore do not file tax returns. However, their electricity bills can surpass Rs. 25,000 per month during the summer due to air conditioner usage.

Although the initial reduction of the threshold from Rs. 75,000 to Rs. 25,000 per month may seem commendable, a closer examination reveals several issues with this decision. Firstly, in a considerable number of cases, the electricity connections are not registered under the names of the actual occupants of the residences.

In instances of rented homes and apartments, the connection is registered in the landlord’s name, but the tenant pays the bill. Similarly, even in cases of self-occupied inherited residences, the connection may be under the name of the father or even the grandfather of the present resident.

While the resident might be an income tax filer, the connection could belong to an individual not listed on the Active Taxpayers List, subjecting the resident to the withholding tax.