Even if the "Sales Tax Special Procedure (Withholding) Rules, 2007" is being abolished under the VAT rules and regulations, a provision of 'withholding of VAT' has been introduced in the Federal Value Added Tax (VAT) Act 2010. Under section of the Federal VAT Act, "the federal government may specify any person or class of persons as withholding agent for the purpose of deduction and deposit of tax on the purchase of goods."
Presently, government departments are working as withholding agents under the "Sales Tax Special Procedure (Withholding) Rules, 2007". The board had declared government departments/autonomous bodies as withholding agents for deducting 3 percent of the total 15 percent payable sales tax involved in transaction of supplies made to these departments. The FBR has also made it mandatory for the units registered with the Large Taxpayer Units (LTUs) to deduct and withhold one percent of value of taxable supplies as sales tax from those suppliers, who do not fall within the jurisdiction of LTUs.
Sources said that the government departments make purchases from the registered suppliers. At the time of issuing bills, departments pay sales tax to these suppliers, but the amount was not deposited in the national kitty. To check this violation, it was decided to deduct 15 percent sales tax on supplies by withholding agents. But, 15 percent deduction had created problems in claiming input tax adjustment. Later another procedure was notified for deduction of three percent tax on supplies made to the government departments.