Effectiveness of Withholding Taxes in Expanding Pakistan’s Tax Base: A Focus on the informal and Undocumented Sectors

Abstract

The study assesses Pakistan’s WHT policy regarding tax base expansion while analyzing its effect on informally operated economic sectors. The Federal Board of Revenue receives large notable contributions from WHTs, but they fail to successfully increase voluntary tax compliance while properly establishing economic formalization practices. The application of WHTs functions mainly as an indirect collection method for untaxed businesses, which does not encourage participation in formal tax registration. Extensive data from policies and research, along with fiscal and administrative information, evaluate both the structural elements and behavioral responses of WHTs. The current WHT system struggles because it contains several crucial problems, including its complicated nature and unhealthy impact on vulnerable populations, while also facing poor follow-up, missing available transaction details, and a lack of cooperation among tax departments. While WHTs successfully generate short-term revenues, they often perpetuate informality through treating withholding taxes as the final payment for most taxpayers.The paper discusses suggested reforms that aim to simplify tax compliance while changing the WHT rules and providing tax compliance reward systems, and leveraging big data analytics for tax administration. The implementation of Withholding Taxes requires supporting tax policy changes alongside better taxpayer involvement to build a sustainable tax foundation in Pakistan. The research advocates for implementing WHT systems within an advanced technology-based fiscal system, which will ensure fair taxation while fostering greater participation from every economic sector.