Slap on the wrist: Ombudsman asks FBR to address anomalies in tax slabs

By Kazim Alam, The Express Tribune

KARACHI: Federal Tax Ombudsman Dr Muhammad Shoaib Suddle has asked the Federal Board of Revenue (FBR) to address the “glaring anomalies” in fourth, fifth and sixth income tax slabs for salaried people on an urgent basis.

In response to a public-interest complaint, Suddle noted in his recommendations that the new tax computation mechanism introduced under the Finance Act, 2012 violates Articles 4 and 25 of the Constitution.

The recommendations of the federal tax ombudsman came after The Express Tribunepublished a story on August 4, which said a salaried person could fall in two income groups simultaneously due to the absence of clear demarcation in the newly adopted income tax slabs.

“Being arbitrary, unreasonable, unjust and discriminatory, such a treatment is tantamount to maladministration as defined in Section 2(3) of the Federal Tax Ombudsman Ordinance, 2000,” Suddle stated, while directing the FBR to file a compliance report before November 12.

He said the argument that the newly introduced slabs were based on the collective wisdom of parliament did not hold water, as the changes in what was proposed in the Finance Bill, 2012, to what emerged in the Finance Act, 2012, did not – prima facie – appear to have been effected after debate or discussion in parliament. “It seems that parliament has not been properly assisted by the FBR in this matter,” he added.

Slabs for the computation of income tax on salaried people were reduced from 17 to six in the Finance Act, 2012, although the new computation mechanism had unclear slab demarcation.

For example, if a salaried person earned Rs2.5 million annually, he fell in the fifth slab with Rs262,500 payable as annual income tax. However, the fact that Rs2.5 million was the maximum limit for the fifth slab and the minimum limit for the sixth slab meant that the same person also fell in the sixth slab, which requires Rs420,000 as income tax, a 60% higher amount.

Under the existing income tax slabs for salaried people, employees making less than Rs400,000 belong to the first slab, where no income tax is due. Income tax on employees belonging to the second slab, who earn between Rs400,000 and Rs750,000, is 5% of the amount that exceeds Rs400,000. The third slab covers people earning between Rs750,000 and Rs1.5 million. Their income tax is Rs17,500 plus 10% of the amount exceeding Rs750,000.

There is no anomaly as far as the first three slabs are concerned. However, the fact that the minimum and maximum taxable amounts in each of the remaining three slabs overlap each other creates an arithmetic problem.

Employees earning between Rs1.5 million and Rs2 million belong to the fourth slab. Their tax is calculated by adding Rs95,000 to 15% of the amount in excess of Rs1.5 million. The fifth slab mandates a tax of Rs175,000 plus 17.5% of the income exceeding Rs2 million for employees, who earn between Rs2 million and Rs2.5 million annually.

The sixth and last slab covers people with an annual income of Rs2.5 million and above. Their tax rate is computed by adding Rs420,000 to 20% of the income exceeding Rs2.5 million.

Published in The Express Tribune, October 26, 2012.

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