This represents a mechanism where the entity responsible for making a payment deducts tax at the point of origin. This deduction is a percentage of the total payment and is remitted to the government. For example, a company paying a contractor for services rendered may be legally obligated to deduct a certain percentage of the invoice amount as tax before releasing the payment.
The implementation of this system enhances revenue collection efficiency for the government. It broadens the tax base and reduces the potential for tax evasion, particularly in sectors where income declaration might be inconsistent. Historically, such a system has been utilized to capture income at the earliest possible point, simplifying the overall tax administration process.
