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Tax rates

June 15, 2019

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ONE of the most important features of the new budget is the sharp increase in income taxes, particularly for individuals and associations of persons. Salaried people will be in for a bit of a shock in August when they receive their first paycheck of the new fiscal year. Eleven new slabs have been created for income tax payers and the lowest earners seem to be bearing the brunt of the increase. It is easy to understand that the steep cuts in income tax that last year’s budget brought had to be reversed. They were issued by a government that was in its last days, and most people agreed that the incoming administration would reverse them.

But more fundamental than adjustment in the tax rate is the change in the underlying philosophy of the documentation of incomes. The previous government brought into the tax system a distinction between filers and non-filers of tax returns through the introduction of the Active Taxpayers List. Those whose names were not on the ATL became liable for penalties each time they utilised the services of the formal economy, particularly banking transactions, where withholding taxes were applied. In time, the penalties were increased to include the purchase of cars and property as well, with the intention that down the road, the purchase of airline tickets and the renewal of ID cards and passports could be made conditional on the ATL as well. The hope was that this would encourage compliance and lead to an increase in the number of filers, thereby bringing in more revenue. But the non-filers proved to be a stubborn lot and did not show up at the tax authorities’ doorstep in droves as they should have.

The current government has done away with this direction altogether, and in the latest finance bill, it has opted for a coercive approach. In his budget speech, the state minister for revenue threatened non-filers with prosecution, and the FBR is known to be demanding that police stations collect data on rental incomes in their localities. Traders will be asked to get themselves registered for a token fee, and income tax payers will be scrutinised using artificial intelligence to discern their consumption patterns and locate high-net worth individuals. Where the previous philosophy was cerebral and subtle and sought to tilt the schedule of incentives for non-filers in a direction that would nudge them towards the tax net, the current approach is robust, direct and seeks to summon non-filers into the net and pursue those who are non-compliant. The first strategy did not work as well as its architects thought. We will see how well the get-tough approach of the present government works. What is different this time is that the government is counting in very significant measure on the success of its new approach to meet its target for incremental revenue this fiscal year. Failure this time carries a far higher cost.

Published in Dawn, June 15th, 2019