ISLAMABAD: The massive increase in income tax exemption slab and lowering of maximum tax rate to 15 per cent from 35pc for salaried and non-salaried individuals will likely to cause around Rs90 billion losses to the national kitty.

The proposed move under the ruling PML-N government’s economic package is likely to wipe out nearly 521,000 taxpayers from the tax net. The government has announced unprecedented relief in income tax rates to super rich people.

Internationally, according to a tax official, highest tax rates exist in the income tax law for those people who earn more.

But the most surprising move was to enhance exemption limit to Rs1.2 million from the existing Rs400,000 at a time when the government is nearing to complete its tenure on May 31, 2018 which economists consider a pre-election rigging move with no justification.

The internal analysis of the FBR shows that in case the government economic package was implemented in its current shape it will lead to further weakening of tax compliance. This means that half of the existing taxpayers will disappear automatically from the tax net, a senior tax official told Dawn.

The income tax system has already deteriorated owing to increasing reliance on withholding taxes. Most economists view withholding taxes in the current shape as indirect taxation in Pakistan, which hit the poor the most.

Official data shows that the contribution of withholding taxes in total income tax was 68pc in the year 2016-17. The ratio of direct taxes in total taxes will come down to 13pc if withholding tax is treated as indirect tax.

The direct taxes ratio of Pakistan stagnates at 38pc for the past many years which is in contrast to most OECD economies where the ratio is around 70pc. “The outcome of the economic package will bring down the overall ratio further,” the tax official said.

Contrary to this, the official said that revenue impact of bringing down of the tax rates to 15pc will be much more in terms of revenue. These supper rich people will save billions in payment of taxes, the official added.

According to the tax official, this decision of the government is likely to encourage international donors who want the country to widen its tax base before asking for more aid.

Only 0.4pc of the population pays taxes in Pakistan, as against 4.7pc in India, 58pc in France and 80pc in Canada.

This is despite the fact that the government has doubled salaries of tax officials in the hope that it will improve the compliance level, but to no avail.

Pakistan continues to have the lowest number of active taxpayers per tax administrator in South Asia — 64. In India, taxpayers per tax administrator share stands at 537, in Sri Lanka 232, in the United States 1,990 and Switzerland 3,182.

Published in Dawn, April 8th, 2018