Tax rates for tax year 2007-a case for marginal relief

ARTICLE (December 05 2006): The tax regime is under process of reformation. At this stage it is premature to assess full impact of these reforms. The CBR's officials attribute achieving and surpassing tax targets to these reforms.

However, many tax experts have a view that surpassing targets is the result of increase in indirect taxes (multiplied by increase in imports and inflationary impact on goods especially petroleum products etc) and ever-expanding withholding taxes.

They observed that numbers are increasing, standard of life of a common man is decreasing. To divide total GDP over total population is a very misleading average to measure reduction of poverty. Fiscal policies should aim at distributing enhanced the GDP over all strata of the society. If enhanced GDP is being concentrated in the higher strata of the society, it would be indicative of socially unjustified fiscal policy.

Increased suicides and long lines on utility stores to purchase goods at subsidised rates indicate that our Finance-turned-Prime Minister's vision of prosperous Pakistan lacks something. Tax policy is not friendly to businesses promoting employment.

While businesses are capital starved, excessive soaking of money in property files and land have rendered them potential landmines for stability of the society. Undesirable exemptions from tax, unjustified rate structure, double taxation of corporate businesses, sales tax on every item of daily use are making the matters worse and draining money from the poor to the rich (which get all privileges and tax cuts).

Rates of tax levied on different incomes indicate priorities of the government. If you are lucky to win a prize of Rs 50 millions on a prize bond, you will have to pay only 10% of the prize money as tax. However, if you earn a taxable income from business above Rs 1.3 millions, you will have to pay tax @25%. If you invest for a long term in shares of a listed company and get dividend, you will pay 10% tax thereon despite the fact that dividend received was out of after-tax income of the company.

On the other hand, if you believe in short term trading of listed shares, you may earn as much capital gain as you can and it would be all free of tax. Against this backdrop it is not surprising if the World Bank and other financial institutions are showing their concerns against dwindling levels of savings (and consequent investments). As rightly pointed out by the World Bank, economic growth cannot be sustained with foreign money alone, domestic saving is the key to success.

In this high-tech world and knowledge based industries, the importance of highly educated people cannot be over-emphasised. While the governments of highly developed countries are providing all sorts of facilities to attract talent to their countries, our visionary leadership takes pride in telling that foreign remittances sent by such workers is the on rise.

The Finance Minister should also explain the reasons for not using their abilities in making Pakistan a prosperous country. Pakistan provides educational facilities, parents pay fees and then sons and daughters of Pakistan flee away to serve others.

Is it not a moment for thought that men with doctorates and masters in Pakistan go abroad and prefer to work even on gas stations there instead of serving in Pakistan. While our village men continue to die due to non-availability of doctors, our Prime Minister says pride in that American community acknowledges services rendered by Pakistani doctors living abroad. Same is the case with other professionals.

Where the fault lies? Not in our stars, but in our policies. There are a number of reasons and all very apparent. To count a few: absence of the rule of laws, increased street crimes, haphazard policies of the government, lack of infrastructure and lack of opportunities in the relevant fields. Let us see how taxation policies discourage earning of higher incomes in Pakistan.

Upto tax year 2006, taxable income of a taxpayer was split into different tax brackets and tax rate were gradually high for higher income brackets. It was progressive taxation.

From the tax year 2007 total taxable income will fall into a particular band of income having a particular rate of tax. It has caused hardships in certain cases.

To have an idea of this undesirable impact, tax on different taxable incomes is calculable as under:

From the above Tables it is evident that new tax rates are seriously flawed. According to these rates if your income exceeds lower band of income by just Re. 1, it may increase your tax liability as high as Rs 52,000 and Rs 84,000 in non-salary and salary cases, respectively. How additional tax of Rs 52000 or Rs 84000 can be justified for an additional income of Re 1 only.

This is also against human resource management practices all over the world and acts as disincentive. The Maslow's theory is taught in every school of business management as well as every training institute of the government to enlighten government officials on the subject.

The fault lies in implementation. It is natural that all working men want to move up in their career for better remuneration and prestige for which they put in the best of their abilities to meet the criteria set for the purpose. However, few would like to be promoted if such promotion means less take home salary. Similarly, taxation of different income bands in its present form is a disincentive to progress and earn more business income.

Further, while tax rates are being reduced as a policy, in case of certain salaried persons, tax burden has increased. Tax on gross income of Rs 600,000 and Rs 800,000 in the tax year 2006 works out as under:

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                                               Rs            Rs
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Gross Salary                    600,000       800,000
With components:
Basic salary                     363,638       484,848
House rent                       163,636       218,182
Utilities allowance              36,363        48,485
Medical allowance             36,363        48,485
Tax                                   23,136        48,712
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According to new tax rate structure, tax liability in the tax year 2007 shall be Rs 24,545/- and Rs 54,545/- for gross income of Rs 600,000 and Rs 800,000/-, respectively which means an increase of Rs 1,409 and Rs 5,833/-, respectively. This unintended increase needs to be rectified.

In view of above, it is suggested that the government should issue SRO to remove hardships and anomalies as under:

1. Marginal relief should be provided in cases where income marginally exceeds a lower band of income. Alternatively, tax rate card should be re-drafted on the pattern it existed before the Finance Act, 2006.

2. Tax rates of salaried persons should be rationalised in such a way that total tax liability in the tax year 2007 on a given taxable income does not exceed such liability in the tax year 2006.

3. In the next budget, taxation of different sectors should be revised to promote employment sectors and discourage dumping of money in unproductive activities.

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                 Non-salaried persons
Income       Rate            Tax             Marginal tax on Rs 1
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109,999     0.00%           -                      -
110,000     0.50%        550                    550
110,001        1%       1,100                    550
125,000        1%       1,250
125,001        2%       2,500                  1,250
150,000        2%       3,000
150,001        3%       4,500                  1,500
175,000        3%       5,250
175,001        4%       7,000                  1,750
200,000        4%       8,000
200,001        5%     10,000                  2,000
300,000        5%     15,000
300,001     7.50%   22,500                  7,500
400,000     7.50%   30,000
400,001       10%    40,000                 10,000
500,000       10%    50,000
500,001    12.50%  62,500                 12,500
600,000    12.50%  75,000
600,001       15%    90,000                 15,000
800,000       15%   120,000
800,001    17.50% 140,000                 20,000
1,000,000  17.50%  175,000
1,000,001     21%   210,000                 35,000
1,300,000     21%   273,000
1,300,001     25%   325,000                 52,000
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                     Salaried Persons
Income      Rate        Tax   Marginal tax on Rs 1
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150000         0          0
150001      0.25%       375                    375
200000      0.25%       500
200001      0.50%     1,000                    500
250000      0.50%     1,250
250001      0.75%     1,875                    625
300000      0.75%     2,250
300001      1.50%     4,500                  2,250
350,000     1.50%     5,250
350001      2.50%     8,750                  3,500
400,000     2.50%    10,000
400001      3.50%    14,000                  4,000
500,000     3.50%    17,500
500001      4.50%    22,500                  5,000
600,000     4.50%    27,000
600001         6%    36,000                  9,000
700,000        6%    42,000
700001      7.50%    52,500                 10,500
850,000     7.50%    63,750
850,001        9%    76,500                 12,750
950,000        9%     85,500
950,001       10%     95,000                 9,500
1,050,000     10%    105,000
1,050,001     11%    115,500                10,500
1200000       11%    132,000
1,200,001  12.50%    150,000                18,000
1,500,000  12.50%    187,500
1,500,001     14%    210,000                22,500
1,700,001     14%    238,000
1,700,001     15%    255,000                17,000
2,000,000     15%    300,000
2,000,001     16%    320,000                20,000
3,150,000     16%    504,000
3,150,001  17.50%    551,250                47,250
3,700,000  17.50%    647,500
3,700,001  18.50%    684,500                37,000
4,450,000  18.50%    823,250
4,450,001     19%    845,500                22,250
8,400,000     19%  1,596,000
8,400,001     20%  1,680,000                84,000
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