Respite for the salaried?

The majority of Pakistanis will certainly be dejected after hearing the budget speech of Ishaq Dar on May 26, 2017. This is not because there will be no relief for them – nobody expects that in Pakistan now – but due to the continuation of the unjust tax system that is anti-growth and anti-people.

The burden of regressive taxes is continuously increasing on the less privileged classes, especially on the salaried people. While the rich are just paying meagre amounts, members of the military-judicial complex and parliamentarians are enjoying extraordinary tax-free perks and benefits.

Out of 90 million active and unique mobile users, only 1.1 percent have filed their tax returns. How many of these 90 million mobile users have taxable income? The Federal Board of Revenue (FBR) has never tried to ascertain that.

Maybe 70 million have no income or earn an income below the taxable limit but are forced to pay 14 percent advance income tax. Out of the 20 million people who earn a taxable income, around 2.5 million are ultra rich – they are either not filing tax returns or showing much lower income than what they actually earn. This is evident from the fact that they possess sprawling bungalows, expensive cars and go for holidays to attractive places every year. The FBR has failed to tax them according to their ability to pay.

This is the real malady we face. Consequently, the main incidence tax, through 70 withholding taxes, is shifted to those who have no income or income below the taxable limit of Rs400,000. Among them, the salaried class is the worst affected. They pay a full tax on their salary, then out of the taxed money, pay advance tax on mobile and another on the fee of their children.

Salaried people are compelled to spend sizeable amounts from their salary on the educational needs of their children (which is the duty of the state) and yet no tax credit or relief is available to them under the Income Tax Ordinance 2001 (earlier, they got a relief of up to Rs36,000). This portrays the apathy of our government towards the salaried class which constitutes an overwhelming majority of the middle-class in the country. On the contrary, unprecedented tax breaks and benefits have been extended to the wealthier echelons of society. Salaried people should be reimbursed for the educational expenses they incur provided they furnish receipts of fee and other expenses.

The government must give incentives for educational investments to industrial houses so that they can make their workers highly skilled and educated. Educational allowance should be tax-free and not be considered a perquisite. We can change the fate of our nation in a few years if education-related tax benefits are made the core of the government’s tax policy.

Health insurance is another important area that needs to be promoted through liberal tax incentives. At present, provision of medical treatment or hospitalisation or the reimbursement of such charges in accordance with the terms of employment is tax-free provided that the National Tax Number of the hospital or clinic is given and the employer certifies and attests medical or hospital bills. Alternately, any medical allowance received by an employee not exceeding 10 percent of his/her basic salary is tax exempt. However, if an employee spends more than these fixed limits, he/she has to pay tax on it.

Since medical expense is treated as a perquisite, any amount exceeding 50 percent of the salary is taxed by the employer. This tax position needs to be rectified. Medical expenditure should not be treated as a perquisite as it is not a fixed benefit or an amenity that periodically accrues from the employer to the employee. Employers should be encouraged through tax benefits to extend medical facilities to their employees and their dependents.

Section 13(7) of the Income Tax Ordinance 2001 taxes the notional benefit arising out of interest-free or concessionary loans given to employees which violates Articles 25 and 38(f) of the constitution and should be deleted.

Salaried individuals should not be taxed unduly as they cannot claim any kind of expenditure against their emoluments, though they expend some part of it purely for employment purposes. In their case, the minimum taxable threshold should be more than that of other people who can claim a host of tax deductible amounts. They should not be taxed up to a gross taxable salary of Rs600,000. Tax slabs in their case should be rationalised: 5 percent on Rs600,001 to Rs1,000,000, 15 percent on Rs1,000,001 to Rs2,000,000 and 25 percent on Rs2000,001 and above.

All professionals working on a salary basis have to spend money to keep their knowledge up-to-date, yet no provision is available to them for claiming the cost of buying manuals and books. This is hampering the growth of the commercial, financial, industrial and service sectors where specialisation is the call of the hour. For example in the IT industry, any highly paid software engineer capable of bringing enormous foreign exchange for the country would be discouraged to work in Pakistan merely because of this unjust tax burden.

There is an urgent need to rationalise our tax policies towards salaried people, both professional and non-professional. They contribute substantially towards economic growth and social development and we should not harm their productivity by regressive and unjust tax measures.

The writer is an advocate of the Supreme Court and adjunct faculty at LUMS.

Email: ikram@huzaimaikram.com

Twitter: @drikramulhaq