Personal Taxes

Earnings tax: FBR tries to scale back the variety of plates to five

ISLAMABAD: The Federal Board of Revenue (FBR) is working on several options to reduce the number of income tax levies from 11 to five in the upcoming 2021-22 budget, in line with best international practice.

Sources told Business Recorder that the government plans to introduce reforms in income tax, which would reduce the tax burden for lower-income panels earning Rs 600,000 a year, while increasing the tax burden for those who are more than 300 Earn Rs, 000 a month.

“The FBR had estimated to raise Rs 125 billion in the current fiscal year from the PIT, but once the reforms are introduced in the next budget, the revenue collection would increase to Rs 150 billion in 2021-22,” they added.

According to sources, the FBR is considering reduced income tax charges (11-5) for white-collar workers and business people. Income tax plates for rental income, dividends and other tax heads as part of the ongoing revision of the plates under the PIT regime (Personal Income Tax).

The FBR has estimated that income tax plate changes for the pay grade will generate Rs 150 billion in the next fiscal year, compared to Rs 125 billion projected for the full 2020-21 fiscal year.

The FBR is actively working on the revised plates for the PIT regime for the next fiscal year.

In this context, the FBR is working on various options to reduce the number of income tax charges for white-collar workers and business people, including the Association of Persons, from 11 to five.

Currently, the salary bracket exemption threshold is Rs 600,000, which is expected to be maintained in the next budget.

The FBR is analyzing various options in order not to increase the tax burden for employees who receive a monthly salary of up to Rs 0.3 million per month.

The tax incidence would nominally increase in middle income tax blocks, and the maximum tax incidence would be increased in the highest income tax brackets, which earn enormous salaries.

Another option considered is to slightly lower the tax burden for the perosns receiving a salary from Rs 0.2 million per month to Rs 0.3 million per month.

In this context, the FBR is developing various options and comparing the existing structure of the control panels with the proposed panels with reduced brackets of 5 for both employees and business people.

According to the sources, the FBR raised around 116 billion rupees from the pay grade in the 2019-20 period.

If the government increases the tax of 25 percent on the pay grade, the revenue generation for the next fiscal year could be around 250 billion rupees.

However, this proposal is unrealistic and impractical to suddenly levy 25 percent tax on all income tax plates in the salary bracket.

The FBR is bringing general sales tax (GST) and PIT reforms to the 2021-22 budget, including reducing the size of income tax plates from 11 to five, reducing tax credits / allowances by 50 percent, special tax procedures for very small taxpayers and the abolition of all sales tax exemptions with the exception of essential items.

As part of the GST reforms, the government will: (i) remove all zero-rated goods (Fifth List of the Sales Tax Act), with the exception of export and capital goods, and move them to the standard sales tax rate; (ii) remove reduced rates under the Eight Schedule and bring all of these goods to the standard sales tax rate; (iii) Eliminate exemptions (Sixth List of the Sales Tax Act) with the exception of a small subset of goods (i.e. staple foods, pharmaceuticals, live animals for human consumption, education and health-related goods) and bring all others at normal rate; and (iv) remove the ninth schedule to replace a specific cell phone tax rate with the default tax rate.

These reforms are expected to yield an estimated 0.7 percent of GDP on an annualized basis.

To simplify and increase PIT progressivity, the government will seek to change the existing tax rate structure by reducing the number of tax rates and income tax brackets from 11 to five and reducing the size of the income slabs to simplify and increase the system Progressiveness; 50 percent reduction in tax credits and allowances (excluding zakat and those for the disabled and elderly); Introducing a special tax regime for very small taxpayers to prevent further erosion of the tax base and to facilitate the formalization of the economy; and adopt a long-term strategy to reduce worker informality and add additional taxpayers to the PIT network.

The reform simplifies the CIT system by streamlining numerous tax exemptions and bringing the rules in line with best international practice (including tax credits, accelerated deductions, exempt income, reduced rates and tax breaks).

Copyright Business Recorder, 2021

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