Budget proposal: Govt considering up to 10% pay raise

Proposal to increase income tax exemption threshold shot down

ISLAMABAD:

The federal government is considering a pay rise between 6% and 10% for public servants in the upcoming budget as an ad hoc allowance instead of revising their basic pay scale, though the finance ministry has not yet taken a decision.

The basic pay is limited given the fact the public servants are currently receiving five ad hoc allowances as part of their salaries, which are 105% of their basic pay, finance ministry officials have told The Express Tribune. This proposal is under consideration for the federal budget for fiscal 2015-16, which is likely to be unveiled early next month.

If the government keeps the pay scale unchanged, the salaried class will not get any significant relief. They will continue receiving various allowances like house rent, medical and travel allowances on the base of their pay scale last revised in 2011. Pensions have also been proposed to be increased by 10%.



Other proposals under consideration include a merger of all the five ad hoc allowances and the revision of the basic pay scales. These carry huge budget implications and the government is not ready for this, sources said. There has been another proposal to merge four ad hoc allowances to revise the basic pay scale up to 60%.

The finance ministry is also considering increasing the orderly allowance of grade 20 to 22 officers.

Meanwhile, the government has shot down a proposal to increase the income tax exemption threshold for the salaried class from Rs400,000 per annum to Rs500,000, fearing a further shrink in the already narrow tax base. But a relief in tax rates is on the cards, sources said.

The proposal to raise the income tax limit was discussed during a meeting chaired by Finance Minister Ishaq Dar. Although the minister favoured the proposal in principle, the fear that it would dent the income tax base stopped the economic managers from taking a pro-salaried class decision.

For the 2015-16 budget, the Tax Reforms Commission recommended increasing the threshold for annual taxable income from the current Rs400,000, which comes to around Rs33,333 per month, to Rs500,000 per annum – Rs41,667 per month – to adjust the impact of inflation on the net salary of employees.

Over one-fourth of the total income tax returns received by the Federal Board of Revenue (FBR) are filed by the salaried class. The actual salaried taxpayers are much more, as most employees receive their salaries after tax deduction from their employers.

As an alternate to the increase in taxable income limit, sources said, the government may provide relief in tax rates by relaxing the taxation slab limits instead.

For instance, a person earning up to Rs750,000 per annum pays 5% tax on the amount exceeding Rs400,000. To offset the impact of inflation, this threshold could be increased to Rs900,000 or even more. This will give benefit to the second lowest income tax slab, where people currently earning in the range of Rs750,000 and Rs1.4 million are paying Rs17,500 plus 10% tax on the amount exceeding Rs750,000.

The cascading impact will be passed onto all the 11 income tax slabs, sources said, adding that numbers of slabs will not be reduced. The highest income tax group having an annual income above Rs7 million currently pays a tax of Rs1.4 million plus 30% of the amount exceeding Rs7 million.

Sources said the slabs would be adjusted in a manner that would not have a significant effect on the FBR’s revenue generation efforts from the salaried class.


Published in The Express Tribune, May 17^th, 2015.