One of the easiest ways to broaden the tax base is to impose higher rate of withholding tax on electricity consumption of domestic consumers to ensure filing of income tax returns for individuals/employees and giving them a chance for claiming refund/adjustment of the paid tax.
Sources told Business Recorder here on Wednesday that the Federal Board of Revenue (FBR) has done some internal working on the assumption of imposing higher rate of withholding tax on electricity consumption of domestic consumers. According to estimates, the FBR can generate an additional amount of Rs 25 billion by bringing 2.5 million more taxpayers directly into the tax net through the measure. However, it depends on the tax authorities to either finalise such proposal ie, to impose adjustable withholding tax on domestic consumers in budget (2011-12). At present, the FBR is examining the pros and cons of the proposal before finalising its comments. During budget preparation exercise, it is an internal working of the FBR, and nothing has been final in this regard.
According to the proposal, various measures have been taken during past many years for broadening of tax base, but broadening of tax base in real sense could not take place. The FBR has to identify the areas where real taxpayers can be found by examining the living style and spending habits of upper middle and elite class. When an individual earns some income, he first of all consumes it in meeting his basic needs and then spends remaining amount in following heads: Respectable living rented or owned premises; respectable transport preferably owned vehicles; best education for children expensive educational institutions; recreation activities membership of clubs; investment real estate, shares, trading, local and international travelling.
Sources said that respectable housing facility is normally arranged through rented, self-owned or family-owned houses/flats. In each rented house, there are two types of taxpayers, one of which is the tenant and the other is the owner. One of the adequately documented expenditure indicators in the residential units of the country is the annual consumption of electricity ie up to 100 units 45 percent; 101 - 300 units 40 percent and above 300 units 15 percent.
This proposal is made on the basis of consumption behaviour of domestic consumers falling under the upper middle and elite class, and if considered appropriate further proposals on other areas identified above can be also be developed, sources said.
According to FBR analysis, it is very interesting to note that only 15 percent of the domestic consumers consume almost 50 percent of the electricity consumed by all domestic consumers. Here is the real tax base of upper middle and elite class. This class alone spends Rs 100 billion on electricity consumption annually. Normally, an earning hand spends at the most 3-5 percent of his income on utilities like electricity and gas; hence estimated annual income of this class would be Rs 2,000-3,300 billion.
At present, there is no withholding tax on electricity consumption of domestic consumers. It is proposed that withholding tax @ 25 percent (or the highest slab of individuals) may be levied on electric consumption where monthly consumption of a consumer is above 300 units. The refund/adjustment of this withholding tax is proposed to be made instantly as follows:
For employees, to be adjusted from his next year's tax liability through the employers upon presentation of proof of the income tax return filed. For other individuals, to be adjusted/refunded by filing the income tax return. If this proposal is implemented, it will result in benefits towards broadening of tax base including additional revenue of Rs 25 billion; 2.5 million taxpayers will directly contribute towards tax base and 1.0 million persons will be identified to be owners drawing rental income and this will further become a source of identifying those owners and approaching them for registration and payment of due tax. Even if Rs 50,000 is treated as minimum monthly rental income of each of the one million houses then revenue of Rs 42 billion under the head of rental income can also be generated, sources added.