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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. | 