The Institute of Chartered Accountants of Pakistan (ICAP) has suggested the rationalization of tax rates on the income of salaried individuals in their proposals for the budget 2023-2024.
ICAP highlights the current tax treatment of salary income, emphasizing the need to restore deductible allowances or adjust tax rates to alleviate the tax burden on salaried individuals.
Challenges in Taxation of Salary Income:
ICAP points out that income under the head of ‘salary’ is currently taxed based on the gross amount without restoring the deductible allowances. While tax rates for different income slabs were reduced, the income slabs and tax rates were subsequently increased without reinstating the deductible allowances for higher taxed salary income. The Finance Act 2019 increased the threshold of salary income to 75% of taxable income, resulting in a lower tax rate compared to other sources of income.
To address the tax burden on salaried individuals, ICAP proposes either rationalizing the tax rates or restoring the deductible allowances for house rent, utilities, conveyance, etc. The threshold of salaried income as a portion of total taxable income should be reverted back to 50%, as in previous years, to benefit individuals primarily earning salary income. The reduced slab rates applicable to salaried individuals should continue to apply even if they have other sources of income, such as passive income.
Rationale for the Proposal:
ICAP argues that it is unjustified to tax salaried individuals, especially those in higher income brackets, at high rates when other taxpayers are generally subject to tax on their net profits. The current disparity in tax treatment places an excessive burden on salaried individuals and calls for a fair and equitable approach.
Additional Proposal for Employer Adjustments:
ICAP also recommends rewriting a section related to employer adjustments for tax deduction from salary payments. The proposal suggests allowing adjustments for deductible allowances, tax credits, advance tax collected at source, and applying the average rate of tax from the preceding three tax years for determining withholding tax on employee payments.
Rationale for the Additional Proposal:
These amendments are necessary to ensure that employees receive full adjustments for all withholding taxes deducted or collected and tax credits. The objective is to prevent employees from being subject to excessive taxation beyond what is due.
ICAP’s proposal to rationalize tax rates or restore deductible allowances for salary income aims to alleviate the tax burden on salaried individuals in Pakistan. By implementing these measures, the tax system can become fairer and more balanced, ensuring that salaried individuals are not disproportionately burdened. The proposed adjustments for employer withholding tax computations would further enhance accuracy and transparency in tax deductions, benefiting both employers and employees.