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PROPOSED INCOME TAX ORDINANCE
2001
The proposed Income Tax Ordinance
2001 has been formulated in the name of simplification. However, reading
through the document, it is revealed that in the name of simplification,
the real objective is to squeezing the existing taxpayers and giving more
powers to the tax authorities. As usual the neck on the guillotine is of
salaried class, which neither can hide its income, nor can have their shutters
down in the absence of having a joint voiced forum.
The main features of the proposed
ordinance related to salaried class are:
1. All perquisites for all levels
have been taxed - Sec13 (2 c).
2. All reimbursements like medical
and Leave Fare Assistance is Sect13 (2 d).
3. The Assessment Officer will now
decide the reasonableness of allowances spent for performance of duties
(implied) - Sec13 (2 c).
4. The value of the perquisites like
car, house and utilities will be determined on fair market value by Assessing
Officer (implied) Sec14 (3, 5 & 11A).
The unique feature of the proposed
ordinance is that now the poor fixed income chap will not only have to
pay tax for the income he has earned but also will be penalised for the
expenses one incurred. The salaried class has gradually been ripped off
their incomes for the last many years. For example the house rent allowance,
which used to be exempt upto 45 per cent of the basic salary was taxed
for income group above 300,000 per annum long earlier. Similarly conveyance
allowance, which was exempt, was also taxed. Now nobody is exempt. Similarly
changes in the tax bracket have also affected them badly. Interestingly,
certain recommendations of the proposed ordinance have already been implemented
in Finance Ordinance 2001. The tax bracket for employees earning over 700,000
per annum has already been increased from 30 per cent to 35 per cent.
The following table gives comparative
analyses of the impact of tax under proposed ITO 2001. For calculation
proposes, the medical expenses have been taken equal to one month basic
salary (a normal practice in private sector). For income group PRs 100,000/month
fair market value of car and house has also been taken tax under for ITO
2001 calculation. Although the proposed ITO 2001 does not provide for tax
rebate as available presently, the effect of rebate has also been taken
into account assuming that this will not be taken away.
In case of person earning PRs 10,000
per month the tax will go up from PRs 450/- to 2500/- per annum marking
an increase of 556 per cent. The proposed ordinance not only increases
the tax burden on fixed income group but also give discretionary powers
to the tax officials by introducing words like "Reasonable" and "Fair market
value" and thus paving way for corruption. This will open the doors of
conflicts between tax authorities and the assesses, the tax authorities
and employers and employee and employers as reasonableness and fair market
value will mean different to different people.
Prior to 1996, the taxation was on
equitable basis (net income less expenses) both for business and salaried
classed i.e. The salaried class was given relief on expenses by exempting
major expenses like house rent, utilities and conveyance allowance. In
1996, however, these expenses (allowances) were treated as perquisites
and thus taxed for income group earning more than PRs 300,000/- per annum.
This has now been applied to all income groups. After 1996 the salaried
class is now taxed on gross income basis whereas the businesses are still
taxed on net of expenses, which is a clear discrimination. The tax brackets
for salaried class range from 7.5 per cent to 35 per cent on gross income
for various income levels, whereas the effective rate of income tax as
% of gross revenue for businesses comes to about 2.5 per cent only as per
provisions made in their audited accounts. The salaried class is the fastest
taxpayer as their tax is deducted at source and deposited within 10 days
by the employer.
Taking such measure, the officials
may be satisfied (according to some people) that have gradually been successful
to bring the private sector take home salaries levels close to what they
are paid, but they must realise that it is not good for the country. The
easy approach by officials to squeeze the existing taxpayers instead of
expanding tax net, is resulting in speeding up brain drain of professionals,
as, such measures directly hit the private sector only.
If the intentions are right, and
objectives and clear the best approach would be to rationalize the tax
system on equitable basis. Simplification does not mean the simplification
of text, as is the case in ITO 2001 case, but simplification of procedures.
Today final assessment for business case takes three to four years (including
all appeal process etc.) resulting in receipt of tax at merely 2.5 per
cent of gross income and that too where profit is declared. It is interesting
to note that Income Tax Ordinance 1979 was also introduced in the name
of simplification but it has now become maze of subsequently issued rules,
clauses and notifications. Let us hope that the new ordinance does not
meet the same fate and another similar exercise is done again after some
time.
If the officials really want to have
simple system, they should aim at taking away all discretionary powers
from the assessing officer and creating an environment where the taxpayers
pay the tax voluntarily. It is suggested that discrimination is eliminated
between various classes of taxpayers. The tax may be charged on gross income
for all segments but the tax rates must not exceed single digit for various
income slabs. The matter has already been raised by few of us with Mr.
Shoukat Aziz the finance minister in meeting with him on the occasion of
his lecture on leadership arranged by a local newspaper at Islamabad. As
promised by him he must intervene and look in the matter before the ordinance
is issued. |
