Monday September 20, 2021

Finance division’s clarification on ‘Taxing the poor’s savings’

July 25, 2021

ISLAMABAD: In an article, titled ‘Taxing the poor’s savings’, published in The News on July 17, 2021, Muhammad Ejaz-ul-Haq and Muhammad Tariq raised a number of concerns regarding the changes in the tax policy applicable to the income from deposits and investments.

The article is misleading as it is based on a poor understanding of benefits available under the national saving schemes (NSS) and the applicable tax regime in the country. We would restrict this response to the policy changes, introduced in the budget and would argue that the changes would have no impact on earnings of the investors in NSS.

One of the hallmarks of new tax measures, announced in the budget, is treatment of all incomes, except capital gains, uniformly to bring equity in the tax regime. In fact, there is an improvement in the withholding regime for small investors. For income up to Rs5 million of interest/profit, there is absolutely no change in tax liability. However, beyond Rs5 million, the rate of withholding tax and applicable tax rates have been made uniform with other sources of income. It must be noted that an investor, earning Rs5 million of interest income, would require a principal investment of at least Rs50 million for the whole year. It is hoped that the authors would not be suggesting that such individuals would be poor. Accordingly, the change in the tax regime has no implications for small investors, as alleged in the article.

Incomes above Rs5 million will be subject to a with-holding tax (WHT) at the rate of 15% against the previous slabs of 15%, 17.5% and 20%. Evidently, the uniformity in the tax regime has a rather favourable implication for the investors of NSS. However, income shall be taxable at standard rates, applicable to individual taxpayers for which tax rate, depending upon quantum of income, may go up to 35%.

This policy change is justified for those taxpayers who are maintaining deposits and investments of hundreds of millions. It is justified on the principle of equity where income from salary and business is taxed at much higher rates than the income from deposits and investments. This is also in accordance with international best practices which shows that passive incomes like interest income are taxed at higher rates.

Addressing the concern on the purported increase in the WHT from 10% to 15%, it is clarified that the applicable tax was already 15%, split in withholding and final tax, the latter was to be deposited with the return. This has been combined and made full and final settlement for the filer of tax return. This is an enhanced feature for simplicity of applicable tax for small investors. The authors have misrepresented the change in the tax regime labelling it as 50% increase in the applicable tax rate, which assertion is not supported by facts.

At several places in the article, the authors have alluded to dilution of investors’ interest in the NSS. There is no basis to make such a claim. The fact of the matter is that there are 2.7 million valued investors in the NSS with a total investment of Rs3.9 trillion, which constitute about 15% of the government's domestic debt. For encouraging investments and inculcating saving habits, the government has taken the most extraordinary step of allowing pensioners, senior citizens and families of Shuhada to enjoy tax-free incomes for investments in Behbood Saving Certificates (BSCs), Pensioner Benefit Accounts (PBAs) and Shuhada Family Welfare Account (SWFA).