The income tax relief

The opposition is busy criticizing the government for the fresh tax amnesty scheme, but that is what opposition does. The new proposed slabs for income tax are being termed as a ‘political’ stunt to attract more urban votes. But this is what precisely government are supposed to do, i.e. work for public benefit and hope for more votes. There is absolutely nothing wrong with that. Moving on to the impact the new income tax slabs carry for the individual salaried class, it comes as a refreshingly pleasant surprise for most observers. Increasing the lower limit of taxable income by three times from Rs0.4 million to Rs1.2 million stands to benefit at least 0.545 million individual tax filers as per the FBR tax directory FY15. So, in simple terms, the number of tax-filers stands to go down by almost half of the current 1.2 million.

Setting the bar high has exempted a high percentage of salaried class from tax liability, as the new bar is way above the top income quintile of Rs33,000 per month. The exempted salaried class may be huge in numbers, but working back on the existing tax rates, it constituted no more than 4 percent of the total direct tax in FY15. Taxes paid by individual filers constituted around 5.6 percent of the total direct tax collected in FY15. So, in terms of fiscal impact, it appears reasonably manageable for the tax authorities.

The effective tax rate for individuals stands to go down by more than half in extreme cases, and by as much as 8-10 times in cases of minimum benchmarks. (See table)

The calculations are based on the pretext that each new slab will carry the benefit of the previous tax slab. The resultant savings in most cases are significant and promise to increase disposal income of all salaried income classes. More clarity remains to be sought, as regards the applicability to AOPs, in which case the impact could be of similar nature.

Either way, the move would be warmly welcomed by the working class. It remains to be seen if the broader objective of widening the tax base is achieved through this means. But as things stand today, this looks a smart move – benefiting salaried class, without much fiscal downside.