PkRevenue.com – The Institute of Chartered Accountants of Pakistan (ICAP) has proposed a series of tax relief measures aimed at easing the tax burden on salaried individuals in the country.
These proposals, outlined in their recommendations for the upcoming budget, address current discrepancies and aim to create a fairer tax system for those earning a salary.
Focus on Withholding Tax Calculations
One key area of concern for ICAP is the current system for calculating withholding tax on salaries. Employers are currently authorized to make adjustments for specific tax credits under the Income Tax Ordinance, 2001. However, ICAP proposes expanding this to encompass a wider range of provisions, ensuring a more comprehensive calculation of tax deductions at source.
Specifically, ICAP recommends allowing adjustments for:
• Deductible allowances under Part IX of Chapter III
• Tax credits under Part X of Chapter III and the Second Schedule
• Advance tax collected at source under Chapter XII
• The average tax rate of the preceding three years for determining withholding tax on specific employee payments
ICAP argues that these amendments are crucial to ensure employees receive the full benefit of all tax deductions and credits they are entitled to. Under the current system, there’s a risk of employees unknowingly overpaying taxes due to incomplete withholding tax calculations.
Addressing the Issue of Salary Taxation
ICAP further highlights an inconsistency in the current policy for taxing salary income. In the past, income under this head was taxed on the gross amount, with corresponding deductions for allowances like house rent, interest on house loans, utilities, and conveyance. However, over time, the tax slabs and rates for salary income were increased without restoring these deductions.
This effectively increased the tax burden on salaried individuals, particularly those in higher income brackets. To address this, ICAP proposes two solutions:
• Rationalize Tax Rates: ICAP suggests revising the current tax rate structure for salary income to make it more equitable. This could involve adjusting tax slabs or reducing rates to better reflect the absence of the previously available deductions.
• Restore Deductible Allowances: Alternatively, ICAP proposes restoring the previous system of exemptions for allowances related to housing, utilities, and conveyance. This would allow salaried individuals to claim deductions for these essential expenses, reducing their taxable income and overall tax burden.
Threshold for Salary Income Proportion
Another area ICAP proposes to revisit is the threshold for salary income as a portion of total taxable income. Currently, this threshold is set at 75%, meaning the preferential tax rates for salary income only apply if salary makes up at least 75% of an individual’s total income. ICAP argues that reverting back to the previous 50% threshold would offer greater tax relief for those who primarily rely on salary income.
ICAP emphasizes that the current system unfairly taxes salaried individuals, particularly those in higher income brackets, at a higher rate compared to other taxpayers whose income may be based on net profits after expenses. They propose revisions to create a more balanced and equitable tax structure for salaried individuals in Pakistan.
