When Pakistan imposed Rs. 80 billion tax on the salaried class under the personal income tax (PIT) regime, over three-fifths of middle-class countries introduced or announced changes to their PIT regimes to provide relief to the salaried individuals, during Covid.
The Organization for Economic Cooperation and Development (OECD) issued a document “Tax Policy Reforms in Low- and Middle-Income Countries” on Monday.
The OECD document covered Albania, Argentina, Armenia, Bosnia and Herzegovina, Brazil, Bulgaria, Cabo Verde, Colombia, the Cook Islands, Costa Rica, Georgia, Honduras, Kenya, Malaysia, Mexico, Morocco, Nigeria, Pakistan, Peru, Senegal, South Africa, Togo, Tunisia, Türkiye, Ukraine, and Vietnam.
On the demand of the International Monetary Fund (IMF) and the Government of Pakistan passed on the burden of Rs. 80 billion on the salaried class by increasing their tax rates and withdrawing the relief earlier announced in budget 2022-23.
It has set the minimum income tax rate of 2.5 percent for those earning up to Rs. 100,000 a month as well as a maximum of 35 percent on the monthly income of over Rs. 1 million, according to the proposed amendments to the Finance Bill 2022.
The coalition government has reversed its two earlier decisions to exempt up to those earning Rs. 100,000 a month from income tax and rolled back its move to reduce the highest income tax rate from 35 percent to 32.5 percent after the IMF refused to budge on its demand.
On June 10, 2022, former Finance Minister Miftah Ismail announced an income tax relief of Rs. 47 billion for the salaried class. The coalition government has not only withdrawn the relief but also imposed Rs. 33 billion in net additional taxes in comparison with June 2021 for the salaried class, throwing a burden of Rs. 80 billion on them.
On Monday, the OECD document revealed that most measures narrowed the PIT base as countries sought to support low-income households, particularly those most affected by the pandemic, and encourage employment, investment, and consumption.
Base narrowing measures included a widening of tax brackets, raises in the basic tax allowance, the introduction, and extension of PIT exemptions and tax administration measures, as well as tax incentives.
Changes to social security contributions (SSCs) were less common than PIT measures but nevertheless sought to improve equity and encourage greater hiring of workers. Like PIT regimes, several countries also extended pandemic-related measures introduced in 2020. Similarly, almost all high-income countries sought to lower the tax burden of PIT and SSCs in 2021 to support recovery from the pandemic.
PIT rate changes were limited, focusing largely on rate reductions for low-and-middle-income households, but base narrowing measures were frequent, often seeking to promote employment and provide in-work benefits. Analogous to the countries covered in this policy brief, few changes to the taxation of household capital income were introduced. SSCs were reduced in a small number of high-income countries through temporary rate cuts and base-narrowing measures.
Middle-income countries used their PIT regimes more often than high-income countries to support small businesses. Many middle-income countries made support contingent on previously unregistered households and businesses registering with tax administrations or on portals for government income support measures, encouraging greater formalization.
LMICs tended to extend administrative measures for longer periods, while UMICs transitioned towards tax policy measures. Several middle-income countries also introduced or amended existing presumptive tax regimes to reduce the compliance costs of entering the formal economy.
Changes to SSCs particularly cuts to SSC rates, were more common in high-income than middle-income countries. However, none of the countries covered in the policy brief reported the introduction of new healthcare-related SSC measures to raise additional revenues for financing the health system.
In contrast, a handful of countries introduced PIT levies and almost a third of countries increased health taxes; most of these countries reported that they introduced these measures to strengthen the capacity of the healthcare sector, which had been under severe strain during the pandemic.
The OECD document further disclosed that the PIT exemptions were also provided in a few middle-income countries.
Peru extended the expiration date for PIT exemptions for income derived from several sources, including from profits or interests in life insurance and interest income from deposits in the Peruvian financial system (excluding interest paid to corporations, which is subject to corporate income tax).
Argentina increased the generosity of some of its existing PIT exemptions to support low- and middle-income households. Türkiye introduced a provision whereby social content creators (e.g., influencers) and app developers are subject to a 15 percent withholding tax (and not the personal income tax) if their earnings do not exceed the amount specified in the fourth income segment of the personal income tax return.
Taxpayers previously liable to small business taxation were also exempt from income tax. Several temporary PIT measures were introduced or extended in response to the COVID-19 pandemic.
Vietnam exempted individuals and households located in areas affected by the COVID-19 pandemic from personal income tax and other taxes on income for the second and fourth quarter of 2021.5 Morocco exempted the wages of employees who had involuntarily become unemployed due to the pandemic from PIT.
Bulgaria provided a one-off increase in tax incentives for households with children and children with disabilities in 2021. Tax administration measures related to personal income taxes were also extended in several low-income countries. Cabo Verde and Tunisia extended the deadlines for personal income tax return filing in 2021 and Cabo Verde continued to provide immediate payments of invoices that the state owed to self-employed and unincorporated businesses suppliers.
Bosnia and Herzegovina (Republic of Srpska) granted funds to business entities and entrepreneurs that had been prohibited from operating during the pandemic from the Republic’s Compensation Fund, which companies’ PIT and social security payments had contributed to. Morocco also extended the deadline for informal actors to register their employment status. Some countries introduced PIT-based narrowing measures to stimulate the economy.
Ukraine introduced amendments to its tax legislation aimed at stimulating investment and promoting the development of the digital economy and the IT industry, through the establishment of a special taxation regime.
Under this tax regime, specialist residents of “Diia City” are subject to a 5 percent PIT rate on their salaries for remuneration under gig contracts, tax rebates are provided for expenses incurred in acquiring shares of “Diia City” resident companies, and tax exemptions on dividend payments are available under certain conditions.
Morocco introduced a temporary PIT exemption for the wages of young workers entering the labor market for the first time for the first three years of their employment, to encourage youth employment.
This temporary measure will apply for the period 1 January 2021 to 31 December 2022. Malaysia extended and increased several tax credits, including for instance fees of self-study courses, medical expenses, costs for childcare services, electrical vehicle charges, and contributions to pension funds, the OECD document added.
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The point is with that much taxes what we are getting in return? Even we have to pay parking rent in hospitals where we hardly get basic health facilities without any respect from doctors to sweepers and toll tax on substandard roads. Why not tax imposed on agriculture businesses?