Are Vehicle Rentals Subject to Contractor Withholding Tax?

Introduction:

Organizations that rent cars from vehicle holders often face challenges deciding whether they should withhold tax on car rental payments or not. The ARD (Afghanistan Revenue Department) has provided guidance on this issue, though the ARD notably changed its position on the matter in 2023.

1. Exemption Period – Prior to July 28, 2022: Before July 28, 2022, the ARD had exempted vehicle rental fees from contractor withholding tax when a vehicle was rented from an individual person (though contractor withholding tax was applicable on vehicle rentals from commercial companies). This was originally a decision made by ARD technical committee – Decision #10 dated April 13, 2013 – to prevent double taxation on individual vehicle holders because according to the Article 71 of the Income Tax Law, individual vehicle holders are required to pay a fixed tax while getting a driving permit (Jawaz-e Sayr).
2. Taxable Period – From July 28, 2022 Onward: The ARD reversed its prior stance on this matter with Decision #2 issued on September 18, 2023. This new decision voided the older Decision #10 from 2013 which exempted individual rental car contracts from contractor withholding, with the new decision being applicable from July 28, 2022 onward. Now all vehicle rental contracts are subject to contractor tax withholding in accordance with Article 72 of the Income Tax Law, including vehicle rentals from individual vehicle owners and commercial companies.

Article 72 of the Income Tax Law states that contractor tax can be credited against subsequent tax liabilities. While there is a clear process in place for commercial companies to claim such credit since they are subject to the annual income tax system, it is not clear if or how an individual vehicle license holder (who would typically fall under the fixed tax system) could claim a credit for contractor tax withheld against a fixed tax liability.

Withholding Rates:

As per Article 72 of Income Tax Law, there are two rates for licensed and unlicensed contractors with respective rates of 2% and 7%. Below are the criteria of licensed and unlicensed contractors when it comes to vehicle rentals:

• Vehicles with a valid driving permit (Jawaz-e Sayr) from Afghanistan traffic directorate, are deemed to be the licensed contractors and are subject to 2% contractor withholding tax on their rental car fees.
• Vehicles without valid/updated driving permits (Jawaz-e Sayr) from Afghanistan traffic directorate are subject to 7% contractor withholding tax.