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ISLAMABAD: The Federal Board of Revenue (FBR) is working on different options to bring down the number of personal income tax slabs from 11 to five in line with the best international practices during the upcoming budget 2021-22.

Sources told Business Recorder that the government plans to introduce reforms in Personal Income Tax, whereby, the burden of tax payment would be decreased on lower income slabs earning Rs600,000 per annum, while tax incidence would be increased on those who are earning over Rs300,000 per month basis.

“The FBR had estimated to collect Rs125 billion on account of PIT in the outgoing fiscal year but after introduction of reforms in the next budget the revenue collection would go up to Rs150 billion in 2021-22,” they added.

According to sources, the FBR is reviewing reduced income tax slabs (11 to 5) for the salaried individuals and business individuals; income tax slabs for rental income, dividend and other heads of taxation under the ongoing exercise of revision of slabs under the Personal Income Tax (PIT) regime.

The FBR has estimated to generate Rs150 billion from changes in the income tax slabs for the salaried class in the next fiscal year as compared to Rs125 billion revenue estimated for the whole fiscal year of 2020-21.

The FBR is actively working on the revised slabs for the PIT regime for the next fiscal year.

In this connection, the FBR is working on different options to reduce the number of income tax slabs from 11 to five for salaried individuals and business individuals including Association of Persons.

At present, the exemption threshold for salaried class is Rs600,000, which is likely to be retained in the next fiscal budget.

The FBR is analysing different options for not raising the incidence of tax on salaried individuals drawing monthly salary upto Rs0.3 million per month.

The incidence of tax would be nominally increased in middle income tax slabs and the maximum incidence of tax would be raised in highest income tax brackets earning huge salaries.

Another option under consideration is to slightly reduce the burden of tax on the perosns drawing salary upto Rs0.2 million per month to Rs0.3 million per month.

In this connection, the FBR is working out different options and comparing the existing tax slabs structure with the proposed slabs having reduced brackets of 5 for both the salaried individuals and business individuals.

According to the sources, the FBR has collected around Rs116 billion from the salaried class during 2019-20.

If the government raises the 25 percent tax on salaried class, the revenue generation could be around Rs250 billion in the next fiscal year.

However, this proposal is unrealistic and impractical to suddenly raise 25 percent tax on all income tax slabs of salaried class.

The FBR is bringing general sales tax (GST) and PIT reforms in budget 2021-22 including decrease in size of income tax slabs from 11 to five, reduction in tax credits/allowances by 50 percent, special tax procedures for very small taxpayers and abolition of all sales tax exemptions except on essential items.

Under GST reforms, the government will: (i) eliminate all zero-rated goods (Fifth Schedule of the Sales Tax Act), except on export and capital machinery goods and move them to the standard sales tax rate; (ii) remove reduced rates under the Eight Schedule and bring all those goods to the standard sales tax rate; (iii) eliminate exemptions (Sixth Schedule of the Sales Tax Act) excluding a small subset of goods (i.e. basic food, medicines, live animals for human consumption, education and health-related goods) and bring all others to the standard rate; and (iv) remove the Ninth Schedule to replace a specific tax rate for cell phones with the standard rate.

These reforms are expected to yield an estimated 0.7 percent of GDP on an annualized basis.

To simplify and increase PIT progressivity, the government will seek to change the existing tax rate structure by reducing the number of rates and income tax brackets from 11 to five and decreasing the size of the income slabs, with a view to simplifying the system and increasing progressivity; reduce tax credits and allowances by 50 percent (except for Zakat and those provided for disabled and senior citizens); introduce a special tax procedures for very small taxpayers, aimed at preventing further tax base erosion and facilitating the formalization of the economy; and adopt a long-term strategy to reduce labor informality and to bring additional taxpayers into the PIT net.

The reform simplifies the CIT system by streamlining numerous tax exemptions and bringing provisions in line with best international practices (including tax credits, accelerated deductions, exempted income, reduced tax rates, and tax liability reductions).

Copyright Business Recorder, 2021