Govt to reduce income tax brackets

ISLAMABAD: The federal government while heeding a recommendation of the International Monetary Fund (IMF), has decided to reduce income tax brackets from eleven to five in the next fiscal year’s budget (FY22).

Presently, there are 11 tax slabs of salaried individuals with a progressive tax rate ranging from 5 per cent to 35pc of income. Individuals with incomes above Rs600,000 are paying 5pc while those who earn more than Rs75,000,000 are pay 35pc tax.

On the other hand, there are eight taxable slabs of income with tax rates ranging from 5pc to 35pc for non-salaried persons making an income exceeding Rs400,000.

The Memorandum of Economic and Financial Policies (MEFP) states that government must change the existing tax rate structure by reducing the number of rates and income tax brackets from eleven to five and decreasing the size of income slabs to simplify the system and increase progressivity whereas the FBR is to reduce tax credits and allowances by 50pc, except for the disabled, senior citizens and recipients of zakat. 

In addition to this, FBR will also introduce special tax procedures for small taxpayers, aimed at preventing further tax base erosion, facilitating the formalisation of the economy, adopting a long-term strategy to reduce labour informality and bringing additional taxpayers into the Personal Income Tax (PIT) net.

Similarly, the IMF has also recommended the FBR to eliminate all zero-rated goods, except on export and capital machinery goods and move them to the standard sales tax rate.

Reforms in GST will broaden the GST tax base and harmonise the system between federal and provincial governments.

Specifically, the GST plan will eliminate nonstandard preferential rates and tax exemptions, and bring goods to the standard rate of 17pc, besides harmonising the Service Sales Tax (SST) across all provinces in coordination with the World Bank (WB). Work in this regard is expected to be completed by the end of June.  

Furthermore, FBR will not only remove reduced rates under the 8th Schedule but also eliminate exemptions in the 6th Schedule, excluding a small subset of goods i.e., basic food, medicines, live animals for human consumption, education and health-related goods, and bring all others to the standard rate.

The tax department will also replace a specific tax rate for cell phones with the standard rate by removing the 9th Schedule.

According to the agreement, the reform is expected to yield 0.4pc of GDP on an annualised basis.

It is pertinent to mention here that the IMF has set FBR’s revenue target at Rs5,963 for the next fiscal year (FY22).

Documents state that the Washington based lending organisation has fixed a revenue that is Rs1,272 billion higher than the revised target of the current fiscal year. The government had requested IMF to decrease the tax department’s target from Rs4,963billion to Rs4,691billion during the current fiscal year. 

The IMF has projected FBR’s revenue at Rs6,941 billion for FY23, Rs7,829 billion for FY24, Rs8,752 billion for FY25 and Rs9,796 for FY26.

Similarly, it has projected an overall revenue of Rs8,814 billion during the next fiscal year including Rs7,395 in billion tax revenue, Rs6,666 billion in federal government revenue, Rs5,963 billion in FBR revenue, Rs2,233 direct taxes, Rs365 billion in federal excise duty (FED), Rs2,563 billion in sales tax, Rs802 in customs duty, Rs607 billion in petroleum surcharge, Rs45 billion in gas surcharge, Rs52 billion GIDC and Rs729 billion in provincial revenue.

During the July-March period, the tax department collected net revenue of Rs3,394 bn. Officials are optimistic that they will achieve the current year target.