ISLAMABAD: The income tax burden on individuals will reduce by 60 to 70 per cent besides outright exclusion of more than 500,000 persons from any tax liability with effect from July 1, 2018 provided the upcoming finance bill protects recent government decisions.

Last week, Prime Minister Shahid Khaqan Abbasi announced reduction in tax rates on the income of individuals with effect from next fiscal year from existing rates of up to 30 per cent to a maximum of 15pc.

Giving it legal cover, the government also promulgated an ordinance on Sunday to amend the Income Tax Ordinance 2001. In view of 120-day limit, the ordinance will need to be made part of Finance Bill 2018-19 to protect it for at least a full fiscal year.

Under the ordinance, the threshold for income tax exemption was increased to annual income of Rs1.2 million (Rs100,000 per month) from existing threshold of Rs0.4m, effectively pulling out about 500,000 people from any income tax liability.

The Tax rates on higher income brackets have also been substantially reduced. As such, annual income between Rs1.2m and Rs2.4m will attract a tax rate of 5pc while the tax rate would be 10pc on annual income of Rs2.4m to Rs4.8m. The income beyond Rs4.8m would attract 15pc tax rate.

A comparison of the old and new tax rates suggest, an annual income of Rs1.5m would attract an annual tax liability of just Rs15,000 next year because the income exceeding Rs1.2m is now subject to 5pc tax.

Under the existing rate, the same annual income is charged a Rs92,000 per year in view of Rs79,500 fixed tax plus 12.5pc of amount exceeding Rs1.4m. This shows a reduction of about 84pc in annual tax liability. In other words, the salary or income of a person in that income bracket would automatically go up by Rs6,400 per month.

Likewise, the annual income of Rs2m would be subject to Rs40,000 a year, compared to Rs172,000 this year, showing a reduction of almost 77pc. This category currently is liable to Rs137,000 plus 17.5pc tax on amount exceeding Rs1.8m.

A person earning Rs2.41m currently required to pay annual income tax of Rs242,000 compared to Rs60,000 from next year, showing a reduction of about 75pc.

Those in the income bracket of Rs3m a year would now have to pay Rs120,000 a year compared to Rs359,500 a year, showing a reduction of 66.6pc. This category is currently liable to 20pc tax rate on amount exceeding Rs2.5m plus a fixed tax of Rs259,500. The income exceeding Rs2.4m will be subject to 10pc tax along with a fixed rate of 60,000.

Similarly, a person earning Rs3.5m would pay Rs170,000 next year compared to Rs472,000 this year, showing a reduction of 64pc. Annual income of Rs4m would be charged Rs220,000 next year compared to Rs597,000 this year, showing a 63pc cut under existing rates.

An annual income of Rs4.5m at present is subject to Rs734,500 at present while the liability on same annual income would decline to Rs270,000 a year, down almost 63pc.

An amount of Rs4.8m currently attracts a tax liability of Rs817,000 a year that would come down to Rs300,000 next year.

Annual income exceeding Rs4.8m would be subject to 15pc tax along with fix tax of Rs180,000 from next tax year compared to current rate of 27.5pc tax on amount exceeding Rs4m along with fixed rate of Rs597,000. Therefore, the tax liability of an income of Rs6m would attract Rs360,000 tax next year compared to Rs1.147m at present, showing a reduction of 69pc.

Those earning Rs7 million a year are currently paying about Rs1.4m tax at the rate of 30pc tax rate but would pay only Rs660,000 next year.

Published in Dawn, April 10th, 2018