ISLAMABAD – The opposition is busy criticizing the government for the freshtax amnesty scheme, but that is what opposition does. The new proposedslabs for income tax are being termed as a ‘political’ stunt to attractmore urban votes.
But this is what precisely government are supposed to do, i.e. work forpublic benefit and hope for more votes. There is absolutely nothing wrongwith that. Moving on to the impact the new income tax slabs carry for theindividual salaried class, it comes as a refreshingly pleasant surprise formost observers.
Increasing the lower limit of taxable income by three times from Rs0.4million to Rs1.2 million stands to benefit at least 0.545 millionindividual tax filers as per the FBR tax directory FY15. So, in simpleterms, the number of tax-filers stands to go down by almost half of thecurrent 1.2 million.
Setting the bar high has exempted a high percentage of salaried class fromtax liability, as the new bar is way above the top income quintile ofRs33,000 per month.
The exempted salaried class may be huge in numbers, but working back on theexisting tax rates, it constituted no more than 4 percent of the totaldirect tax in FY15. Taxes paid by individual filers constituted around 5.6percent of the total direct tax collected in FY15. So, in terms of fiscalimpact, it appears reasonably manageable for the tax authorities.
The effective tax rate for individuals stands to go down by more than halfin extreme cases, and by as much as 8-10 times in cases of minimumbenchmarks. (See table)
The calculations are based on the pretext that each new slab will carry thebenefit of the previous tax slab. The resultant savings in most cases aresignificant and promise to increase disposal income of all salaried incomeclasses. More clarity remains to be sought, as regards the applicability toAOPs, in which case the impact could be of similar nature.
Either way, the move would be warmly welcomed by the working class. Itremains to be seen if the broader objective of widening the tax base isachieved through this means. But as things stand today, this looks a smartmove – benefiting salaried class, without much fiscal downside.