Construction Law/Withholding Tax
QUESTION: Dear Sir
For a construction contract, withholding tax is deducted at source while making payments to the Contractor. The Contractor, if registered with CBR may get the deducted amount adjusted, while filing Income tax Return.
The Employer should reimburse the deducted amount to the Contractor.
Interestingly most of the Employer prepares Engineer’s Estimate/BOQ with an Item for “Withholding Tax”
Kindly also intimate the implication of duties and taxes under E&M/Supply Contracts, when goods supplied have been manufactured outside the country.
ANSWER: Dear Jawaid,
Thank you for your question.
As for as i could understand, you have asked my comments on following points.
(a) The withholding tax is to be deducted at source by any Employer while making any payment to the vendor / contractor. This deduction at source can be fixed or adjustable against tax return at the end of the financial year and is dependent on the firm itself how they have arranged with the tax authorities. The taxation law permits both scenarios and you have to contact an Income tax practitioner on the subject before taking further action. Please note that tax is not an expenditure but an obligation and so i do not agree with Employers who consider it as a expenditure
(b) Please note that where contract provides for payment in whole or in part to be made to the contractor in foreign currency to a contractor / supplier through a contractor in a foreign country, such payment shall not be subject to variation in the rate or rates of exchange between specified foreign currency and local currency as quoted by a contractor at the time of submission of his bid. This way escalation in cost for foreign products are Employer's risk.
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The 2nd part of my question is the implication of duties and taxes under E&M/Supply Contracts, when goods supplied had been manufactured outside the country i.e. in order to avoid double taxation, duties and taxes once levied on the product outside the country, may not be imposed again here (in Pak.), therefore duties and taxes deducted at Port (in Pak.) shall be reimbursed to the Contractor/Supplier. Please comment
thank you for coming back and letting me know where i miss understood your question number 2. let me explain my view point in general as follows.
The double taxation issue has to be reviewed with respect to MOUs and legislatory enactments that GOP has carried out/issued after negotiating various terms with different countries so that the nationals of two countries in a specific agreement do not have to pay income tax twice in both countries where they are carrying out their business activities. I suggest that you find out more details for such agreements from the ministry of commerce for the country from which you are importing some equipment etc. and act according to its provisions mentioned therein.