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Income Taxes are Still Low

Income Taxes are Still Low

In my previous post, I argued that income taxes are very low in Pakistan. Some friends raised valid points in contention, some angry people commented on other issues (I was arguing about the rate of income taxes in isolation, not the wider out-of-tax-net situation), and others suggested comparing to previous years.

A friend sent his firm’s take on the new tax slabs and how it’ll affect various income groups. People at the lower spectrum at the bracket, the young white collar ones are angry for obvious reasons:

Post 2The figure aims to show that the effective increase in tax rates has been the worst for the lower tax brackets, decreased for the middle ones and progressively increased for the higher ones. The lower brackets are actually paying a meager Rs 2,500 annually more. This is not middle class ki kamar torh di.

Dawn today argues that the upper echelons of the civil bureaucracy fall into the brackets which will see an effective lowering of tax burden on them and it’s their handiwork (it’s shown in the graph below). There is obvious truth in that, but Dar wasn’t lying when he said he was taxing the rich more. He spoke half the truth, not a lie.

I would argue that it’d better and more fair to see the effective increase in rate of taxation (i.e. effective tax rate moved from X% to Y%). So here’s that:

chart_2

Please note, the previous graph is comparing the current/ending and upcoming financial years.

For what it’s worth, Association of Persons (AOPs) and non-salaried individuals will see an overall increase of tax burden, which is good.

Post 1

But the main point for this post is that income tax rates are actually lower than they used to be only two years ago. The Finance Act 2011 had flat %age tax rates and the Finance Act 2012 introduced the X + Y% tax rates. Income tax rates in FY 13-14 are actually lower than they were in FY 11-12. Everybody got a major tax break in FY 12-13 and tax rates are not back to the original level yet. The exception is the highest income bracket which has seen a slight increase, but as mentioned before, only about 3,000 people fall in that category anyways. I’m going to ignore inflation effects (compounded effect would be around 18-20% probably for the two years) since I’m not comparing quality of life here.

Here is a table of tax breaks along income groups given in FY 12-13. Did anyone thank the PPP?

Post 3

Here’s a chart showing the PPP empowering the ‘middle class’.

chart_3

Since I’m a pedant, a setup a chart to compare tax rates across the three financial years. And here is a comparison of income taxes along some income groups in the three financial periods: (Complete Excel Sheet can be accessed here)

IT Chart 3

Follow to the Excel sheet  or click on the image for a better look. For a more clear look, here’s a plot on the difference between the income tax rates between FY 11-12 and the suggested rates for FY 13-14:

chart_1

So the conclusion is: Everyone except the super-rich salaried are paying less in income taxes than they were two years. What’s the fuss and the tears about then? Unless you are making Rs 7 million+, you are paying lower income taxes than before. Jiye Bhutto.

People who took a closer look at the numbers might have noticed that two years ago, everyone making above Rs 1.1mn annually (~Rs 92,000/month) was paying a 10% or greater income tax rate. Now only people making more than Rs 2.5mn annually (~210,000/month) pay a 10% or greater income tax rate. The highest rate has shifted and it’s no longer a flat 20% but the lower brackets – the vast majority of people – are paying very meager income tax.

Note: Calculations based on Finance Act 2011 read alongwith marginal tax relief given through Finance Act 2008, Finance Act 2012 (marginal tax relief ceased to have much effect, only at some notches in higher income brackets had it an effect) and Finance Bill 2013 where due to the large number of brackets, marginal relief ceases to have any effect.

About Shahid Saeed

Shahid likes to waste time reading history.

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