Excessive Withholding Tax Deductions to Part-Time Artists and Students were Unjust and constituted Maladministration --- Federal Tax Ombudsman
Islamabad 11-09-2024: In a significant ruling, the Federal Tax Ombudsman (FTO) has declared that the excessive withholding tax deductions made by the Punjab Council of Arts on payments to part-time artists and students were unjust and constituted maladministration. The ruling came in response to complaints filed under Section 10(1) of the Federal Tax Ombudsman Ordinance, 2000, highlighting the improper application of Section 156 of the Income Tax Ordinance, 2001.
The complainants, who are students and part-time artists, received small payments ranging between Rs. 2,500 and Rs. 25,000 annually as honoraria or participation fees for performing at events organized by the Punjab Council of Arts. However, withholding tax was deducted at the rates of 20% for filers and 40% for non-filers, under Section 156, which applies to prize winnings such as prize bonds, lotteries, and promotional events.
The complainants argued that these deductions were unjust, given that they were not receiving prize money but payments for services rendered. The department, in its defense, claimed that the payments constituted prize money, thereby justifying the withholding tax.
After examining the facts and the legal provisions, the FTO ruled in favor of the complainants, establishing that the payments in question did not fall under the scope of Section 156. The FTO determined that the correct provision applicable to these payments was Section 153(1)(b) of the Income Tax Ordinance, 2001, which pertains to withholding tax on services rendered and applies only if the payments exceed Rs. 30,000 in a financial year. Most of the complainants’ earnings were well below this threshold.
The FTO emphasized that Section 156 explicitly applies only to specific categories of prize winnings, such as prize bonds, lotteries, and promotional prizes, none of which were relevant to the payments made to the artists. The judgment criticized the tax authorities for misapplying the law, causing undue financial hardship to marginalized individuals.
The FTO found that the wrongful deduction of withholding tax under Section 156 amounted to maladministration, as defined under Section 2(3)(1)(a)(b)(c) of the FTO Ordinance, 2000. The excessive deductions placed an unnecessary financial burden on low-paid students and part-time artists, who were already struggling to make ends meet.
This ruling sets an important precedent for the treatment of payments made to part-time workers and artists, reaffirming the need for tax authorities to correctly apply tax provisions. The decision also highlights the rights of marginalized individuals to fair tax treatment and the consequences of misapplying tax laws.
Legal experts view this decision as a significant step in protecting low-income earners from excessive taxation and reinforcing the principle that tax laws must be applied based on their plain meaning.
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