Take-home salary to take a hit thanks to new income tax brackets

Updated June 12, 2019

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The income tax exemptions announced last year, which had generously excluded everyone with a salary of less than Rs1.2 million a year (Rs100,000 a month) from paying income taxes, have been scrapped. Photo: File
The income tax exemptions announced last year, which had generously excluded everyone with a salary of less than Rs1.2 million a year (Rs100,000 a month) from paying income taxes, have been scrapped. Photo: File

Aside from the slew of indirect taxes (and some exemptions) announced by the Pakistan Tehreek-i-Insaf government on Tuesday, discussed here, there still remains the thorny matter of income taxes (which are back with a vengeance).

From the budget documents, it is clear that apart from higher prices of some kitchen items and everyday goods, salaried Pakistanis will also have to brave a smaller pay cheque in fiscal 2020.

The income tax exemptions announced last year, which had generously excluded everyone with a salary of less than Rs1.2 million a year (Rs100,000 a month) from paying income taxes, have been scrapped.

Observing that the exemption had been “unprecedented and distortionary” — an election year windfall — the government has proposed reinstating taxes on everyone making a salary of more than Rs600,000 a year (or Rs50,000 a month). The limit for non-salaried individuals has been revised to Rs400,000.

It has also increased tax rates for both salaried and non-salaried persons.

Salaried persons

In the case of salaried individuals, the government has introduced 11 tax slabs with a progressive taxation rate ranging from 5pc to 35pc of income.

It is as follows:

  1. Where taxable income does not exceed Rs600,000, individuals will pay zero tax.
  2. Where taxable income exceeds Rs600,000 but does not exceed Rs1,200,000, individuals will pay 5pc of the amount exceeding Rs600,000.
  3. Where taxable income exceeds Rs1,200,000 but does not exceed Rs1,800,000, individuals will pay Rss30,000 plus 10pc of the amount exceeding Rs1,200,000.
  4. Where taxable income exceeds Rs1,800,000 but does not exceed Rs2,500,000, individuals will pay Rs90,000 plus 15pc of the amount exceeding Rs1,800,000.
  5. Where taxable income exceeds Rs2,500,000 but does not exceed Rs3,500,000, individuals will pay Rs195,000 plus 17.5pc of the amount exceeding Rs2,500,000.
  6. Where taxable income exceeds Rs3,500,000 but does not exceed Rs5,000,000, individuals will pay Rs370,000 plus 20pc of the amount exceeding Rs3,500,000.
  7. Where taxable income exceeds Rs5,000,000 but does not exceed Rs8,000,000, individuals will pay Rs670,000 plus 22.5pc of the amount exceeding Rs5,000,000.
  8. Where taxable income exceeds Rs8,000,000 but does not exceed Rs12,000,000, individuals will pay Rs1,345,000 plus 25pc of the amount exceeding Rs8,000,000.
  9. Where taxable income exceeds Rs12,000,000 but does not exceed Rs30,000,000, individuals will pay Rs2,345,000 plus 27.5pc of the amount exceeding Rs12,000,000.
  10. Where taxable income exceeds Rs30,000,000 but does not exceed Rs50,000,000, individuals will pay Rs7,295,000 plus 30pc of the amount exceeding Rs30,000,000.
  11. Where taxable income exceeds Rs50,000,000 but does not exceed Rs75,000,000, individuals will pay Rs13,295,000 plus 32.5pc of the amount exceeding Rs50,000,000.
  12. Where taxable income exceeds Rs75,000,000, individuals will pay Rs21,420,000 plus 35pc of the amount exceeding Rs75,000,000.

Non-salaried persons

For non-salaried persons deriving income exceeding Rs400,000, eight taxable slabs of income with tax rates ranging from 5pc to 35pc are being introduced in the following manner:

  1. Where taxable income does not exceed Rs400,000, individuals will pay 0pc.
  2. Where taxable income exceeds Rs400,000 but does not exceed Rs600,000, individuals will pay 5pc of the amount exceeding Rs400,000.
  3. Where taxable income exceeds Rs600,000 but does not exceed Rs1,200,000, individuals will pay Rs10,000 plus 10pc of the amount exceeding Rs600,000.
  4. Where taxable income exceeds Rs1,200,000 but does not exceed Rs2,400,000, individuals will pay Rs70,000 plus 15pc of the amount exceeding Rs1,200,000.
  5. Where taxable income exceeds Rs2,400,000 but does not exceed Rs3,000,000, individuals will pay Rs250,000 plus 20pc of amount exceeding 2,400,000.
  6. Where taxable income exceeds Rs3,000,000 but does not exceed Rs4,000,000, individuals will pay Rs370,000 plus 25pc of the amount exceeding Rs3,000,000.
  7. Where taxable income exceeds Rs4,000,000 but does not exceed Rs6,000,000, individuals will pay Rs620,000 plus 30pc of the amount exceeding Rs4,000,000
  8. Where taxable income exceeds Rs6,000,000, individuals will pay Rs1,220,000 plus 35pc of the amount exceeding Rs6,000,000.

No more exemptions on ‘gifts’

The government has also wised up to the practice of people avoiding taxation and hiding undisclosed sources of income by declaring assets as ‘gifts’.

According to the new policy, all ‘gifts’ will now be considered ‘income from other sources’. The only exceptions that will be made will be for ‘genuine gift transactions’, i.e. on transactions between close family members and so on.

“Consequently any amount in cash or fair market value of any property including immovable property would be treated as gift,” the government says.

What happens if I do not file my tax returns?

The government has also acted on a longstanding complaint from the returns filing, upstanding members of the citizenry: what happens to those who continue to not file tax returns?

For starters, the government has made filing returns even for non-filers easier. It has done away with the rule that if you do not file your returns by the deadline, you will not be placed on the Active Taxpayers List (ATL). This may seem counter-intuitive, but the government says it will a) refuse any refund to late filers for the tax year in which returns were filed late, and b) impose a nominal tax for placement on ATL after the due date.

The tax rates for b) are:

Company: Rs20,000

Association of persons: Rs10,000

Non-salaried individuals: Rs3,000

Salaried individuals: Rs1,000

If these do not seem sufficient, consider the penalties for not filing returns at all: the government has made it clear that those persons who do not appear on the ATL will be subjected to 100pc increased rate of withholding tax.

It has also required all withholding agents — all persons/companies/legal entities authorised to deduct withholding taxes — to “clearly specify the names, CNIC or any other identification of such persons in the withholding statement so that legal provisions to enforce return can come into effect”.

If this penalty — 100pc increased withholding tax — has been imposed on a person, and that person still fails to file their tax returns for the year in which that tax was deducted, the Income Tax Commissioner “shall make a provisional assessment within sixty days of the due date for filing of return by imputing income so that tax on imputed income is equal to the hundred percent increased tax deducted or collected from such person and the imputed income shall be treated as concealed income”.

If the person files their returns within 45 days of this provisional assessment, they will avoid further proceedings. If not, the commissioner will initiate penalty proceedings against the person for the crime of concealing their income.

Speaking of returns, what happens to refunds?

The government acknowledges that taxpayer refunds caught up in the system have resulted in a liquidity crunch for businesses. However, it also states that releasing all the refunds would impact revenue generation and is hence untenable.

To counter this problem, it is offering promissory notes to taxpayers through a newly-formed company called the FBR Refund Settlement Company Limited.

“The bonds are to have a maturity period of three years, after which the company shall return the promissory note to the Board and the Board shall make payment of amount due under bonds along with profit due to the bond holders,” the government promises.

Other measures

The government is also closing in on foreign remittances that are used as a source of investment. Where previously you could invest up to Rs10 million without being asked the source of funds, now you will need to show a money trail for any investment through foreign remittance of more than Rs5 million.

Promisingly, the government has also incentivised companies to hire fresh graduates, promising them tax credits if they do so.

“Persons employing fresh qualified graduates, having graduated after July 1, 2017 from universities or institutions recognized by the Higher Education Commission would be given a tax credit equal to the amount of annual salary paid to such graduates. The tax credit shall be deducted from the tax payable by such persons and would be in addition to the expenditure claimed by businesses on payment of salary to their employees,” the government promises.