The decision to reduce the rates was taken to appease bankers who are considered very close to the new government. CREATIVE COMMONS
ISLAMABAD:
In the new tax measures proposed in the Budget 2013-14, the Pakistan Muslim League-Nawaz government has provided an opportunity to the banks to avoid billions of rupees in taxes by reducing the rate of dividend income earned by investing in treasury bills and the stock market through asset management companies from 35% to 25%.
The top five banks of the country have grown their bottom-line over the years by making risk-free lending to the government through bonds and T-bills and earning double-digit returns. The federal government had become a desperate borrower and that allowed the banks to pile up big fortunes.
The move by the government is contrary to the claims of taxing the rich to overcome the economic crisis as it has increased the tax burden on the salaried class by a third, while the tax burden on the non-corporate business class – also known as association of persons – has grown three-fold.
The new tax measures are likely to fuel speculation that the PML-N government does not treat all segments of the society equally and always tilts in favour of the corporate class of the country.
Through the Finance Act 2013, the government has proposed to reverse the rates of dividend income that had been increased in the previous budget aimed at plugging loopholes that the bankers were successfully exploiting.
According to the finance bill, “the rate of dividend income earned by banks from Money Market Funds and Income Funds, and gain from disposal of shares of listed companies within one year of acquisition is proposed to reduce from 35% to 25%”. It has proposed amendment to the seventh schedule of the Income Tax Ordinance to give effect to the decision.
The Federal Board of Revenue had taken the decision of increasing taxes to end the practice of banks using asset management companies for transactions to dodge taxes worth billions. Since the corporate tax rate was 35%, the big banks were investing through asset management companies.
The country’s two leading banks were involved in re-routing their funds to these asset management companies for investing in government securities to evade taxes, compelling the government to increase the rates.
The sources said the decision to reduce the rates was taken to appease bankers who are considered very close to the new government. Federal Board of Revenue Chairman Ansar Javed was not available for comments.
In the outgoing fiscal year, the federal government borrowed Rs2.024 trillion, almost the entire amount from the domestic market. For the next fiscal year, however, the government has projected a deficit of Rs1.651 trillion and only Rs169 billion will be borrowed from abroad as budgetary support while the rest will be arranged from domestic sources.
At a time when the government reduced the tax burden on the banking sector, it significantly increased income tax rates for the salaried class and non-corporate business class.
Against income tax rates ranging from 10% to 25% of taxable income, the federal government has proposed to increase the rates up to 35% for the association of persons. This has resulted in additional tax burden ranging from 33% to 215% for this class.
Those non-corporate businesses whose annual earning was up to Rs750,000, the tax burden on them will be doubled. For the category of Rs750,000 to Rs1.5 million, the tax burden will be increased by another 59%. For Rs1.5 million to Rs2.5 million, tax liabilities have been increased by 43%, for Rs2.5 million to Rs4 million, tax liabilities will increase by a third, for Rs4 million to Rs6 million, the burden will increase by 106% and the Rs6 million to Rs8 million income slab will bear an additional tax burden of 215%.
Similarly, for the salaried class, the tax burden had been increased by up to a third. As compared to other income groups, tax liabilities of the highest income group of over Rs10 million will increase by 33% followed by the second highest income group of Rs7 million whose liabilities will increase 24%.
Due to uneven rates, the tax liabilities of the lowest income group having annual income of Rs400,000 to Rs500,000 will be increased by 22% when compared with the liabilities of this year.
Published in The Express Tribune, June 15th, 2013.
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U forgot that the dividend income being taxed at 25% would have already been taxed in the asset management company. AMC's profit b4 tax x tax rate = AMC's PAT from which the bank will get its dividend which will also be taxed at 25%.
@zain: tax rate is low because per capita income is low. Don't compare our tax rates to the rates of the developed world. Secondly the whole concept is to tax the rich and give relief to the poor whereas this budget is exactly the opposite.
The dirty rich will continue to enjoy tax reliefs in Pakistan, but pay more tax in foreign countries where their assets are located. Sad, but reality is that PMLN is rich friendly government, while PPP was thoroughly corrupt.
So basically Noora league is giving relief to Mansha, while its dumb voters will enjoy more free laptops.
@Zain:
I wonder if you are able to understand English or you are just another PML-N fanboy in denial. The main point of the article is that the tax burden on the very rich has been reduced while it has been substantially increased on the salaried educated urban class (precisely those people who are too smart and well-informed to vote for PML-N).
Amazingly bad reporting. Rates are despicably low so 59% or 33% increase on tax slabs are nothing. Income tax levels in Pakistan are unsustainably low. Tax collection is a different matter. Rates themselves are low.