FBR makes a mistake in income tax law

Absence of clarity in the law makes tax avoidance possible.

KARACHI: The government has reduced the number of slabs for the computation of income tax on salaried people from 17 to 6 in the Finance Act 2012-13. Besides providing taxpayers with ‘relief,’ another reason to cut the number of slabs by almost two-thirds was to simplify the tax code.

However, instead of simplifying the income tax computation, the revised slabs have further complicated the procedure, according to tax consultants. The absence of clear demarcation in income tax slabs has made it possible for a salaried person to fall in two income groups simultaneously, and save hundreds of thousands in taxes by being a little shrewd.

“If somebody earns Rs2.5 million annually, he falls in the fifth slab with Rs262,500 payable as annual income tax. However, as per the same Finance Act, the same person also falls in the sixth slab, which mandates a whopping Rs420,000 of income tax, a 60% higher amount,” said Komail Abbas Badami, who works as a partner at Badami Law Associates, a corporate and tax consultancy firm based in Karachi.

The original draft of the Finance Bill 2012-13 presented in parliament in June had five income tax slabs for salaried people. However, another slab was added later on, and the approved Finance Act now contains six slabs.

Employees earning an annual salary of less than Rs400,000 belong to the first slab, where no income tax is due. Income tax on employees belonging to the second slab who earn between Rs400,000 and Rs750,000 have to pay 5% as income tax on the amount that exceeds Rs400,000.

The third slab is for employees earning Rs750,000 to Rs1.5 million. Their income tax is Rs17,500 plus 10% of the amount exceeding Rs750,000.

However, the fact that the minimum and maximum taxable amounts in each of the first three slabs overlap those of the preceding and proceeding slabs does not create an arithmetic problem.

But a computational issue arises when calculating income tax for salaried people belonging to any of the top three income tax slabs, as illustrated by the example cited by Badami.

The fourth slab is for employees earning between Rs1.5 million and Rs2 million. The tax for this slab is calculated by adding Rs95,000 to 15% of any income that exceeds Rs1.5 million.

The fifth slab imposes a tax of Rs175,000 plus 17.5% of the amount exceeding Rs2 million for employees earning between Rs2 million and Rs2.5 million.

The sixth and last slab is for employees earning Rs2.5 million and above. The tax rate on them is Rs420,000 plus 20% of the income exceeding Rs2.5 million.

“The Federal Board of Revenue (FBR) has made a mistake, as the confusion would not have occurred had the Finance Act retained the slabs initially introduced in the Finance Bill,” Badami said.

“In the Finance Act, the FBR revised the slabs and imposed more taxes on people falling in higher slabs. But FBR officials left the wording unchanged that describes these slabs. Either the word ‘exceeding’ should be inserted for the last three slabs or Rs1 should be added to the minimum amount in each of these slabs,” he added.

When contacted, the official spokesperson for the FBR said the matter was not in her knowledge. Despite many attempts by The Express Tribune, the FBR members of Inland Revenue could not be reached for comments.

Correction: The earlier headline of this article was misleading and has been changed.

Published in The Express Tribune, August 4^th, 2012.