Netting the netted: Govt may further burden taxpayers for FBR’s negligence

May increase taxes for non-corporate businesses, high-income individuals.

ISLAMABAD:

Following the failure of the tax authorities to broaden the tax base, the government is now considering increasing the tax burden on the non-corporate business class by a fifth, while also putting more pressure on salaried individuals whose annual income Rs1.5 million or higher.

Sources in the Federal Board of Revenue (FBR) said that a proposal to increase the income tax rate from 25% to 30% for Associations of Persons (AOPs) from July this year is among the proposals shortlisted for further deliberation. Tax authorities are also considering keeping a flat rate of 30% for AOPs, as against graduated rates based on income thresholds, they added.

AOPs’ rates are to be increased on the basis of the argument that the practice encourages corporatisation by urging AOPs to form companies, say officials involved in this exercise. Currently, the corporate income tax rate is 35%, which the FBR will most probably keep unchanged as it is not willing to reduce rates to 32% despite recommendations from various quarters.

However: “Corporatisation cannot be achieved by simply increasing the rates, as there is no corporatisation culture in the country,” Dr Ikramul Haq, an expert in corporate tax affairs, complained to The Express Tribune. He said it was a myth that AOPs can be pushed to form companies by increasing tax rates applicable on them.

Explaining their modus vivendi, Dr Haq said that: “The AOPs want hassle-free business and want to avoid obligations like the quarterly filing of financial reports with the Securities and Exchange Commission of Pakistan.”

Income tax

Sources said the government was also considering increasing the tax rates for the two highest-income slabs in the individual salaried class category. There is a proposal on the table which calls for increasing the tax burden on the highest income group by a fourth, sources said. The highest income group of Rs2.5 million and above currently pays a flat rate of Rs242,000, plus 20% of income as tax. The proposal is to increase the rate to 25%, they added.

For the second highest income group, comprising those with an annual income of Rs1.5 million to Rs2.5 million, the proposal is to increase the rates to 17.5% – an increase of 16.6% over the prevailing rate of Rs92,500 plus 15%.

Tax rates for the first two income tax slabs are expected to remain unchanged. Those who have annual income of Rs400,000 and below are exempted from income tax payments.

In the last Budget, the previous government had reduced tax slabs from 16 to five, besides simplifying the rates.

While the FBR may find justification for increasing the tax burden of non-corporate business class and the highest income earners in the salaried category, it is pertinent to mention here that the authority has consistently failed in its efforts to broaden the tax net over the years. Currently, less than 800,000 Pakistanis pay any income tax, most of whom are salaried persons whose tax is deducted at the source.

Of FBR’s total collection, less than 40% comes from income taxes, and more than half of that comes from withholding taxes. The FBR insists that the withholding tax is a direct tax, but experts treat it as an indirect and regressive tax.

These proposals are being finalised by the FBR under the supervision of Abdullah Yusuf, a former FBR chairman and a confidante of newly-appointed Finance Minister Senator Ishaq Dar. Yusuf was FBR chairman from 2003 to 2008, and has been blamed in the past for giving massive tax breaks to influential lobbies, besides bringing an end to audits of defaulters by introducing the Universal Self Assessment scheme. He is also the chairman of the Advisory Council of Independent Power Producers.

Published in The Express Tribune, June 8^th, 2013.

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