Tax hike likely to affect higher income individuals. PHOTO: AFP

ISLAMABAD: In a bid to raise funds for the war against the Taliban, the government is likely to levy an income tax surcharge on individuals with high incomes in the budget for fiscal year 2016.



The proposal for a surcharge was discussed during a meeting of senior finance officials in the government, chaired by Finance Minister Ishaq Dar, according to officials at the finance ministry. They said the government was considering levying the tax on individuals who fall in higher income tax brackets. The officials said that the minister has given his consent and that the proposal would now be sent to Prime Minister Nawaz Sharif for approval.



The options considered by the government were either levying a new ‘super tax’ or else impose a surcharge on existing tax payments already owed by people in higher tax brackets. Given the government’s desire to be able to claim a ‘no new taxes’ budget, the ‘super tax’ proposal was ruled out. The surcharge being considered would likely be between 5% and 10% of the tax owed by individuals in higher tax brackets.



Once approved by the prime minister, the levy would be announced for higher income groups, though precisely which income tax brackets would be subject to the surcharge is still being determined by Pakistan Revenue Automation Ltd (PRAL), the information technology subsidiary of the Federal Board of Revenue (FBR).



For fiscal year 2016, the government has estimated a regular defence budget of Rs772 billion. In addition to the regular budget, the military has demanded roughly Rs45 billion for spending on Operation Zarb-e-Azb and raising nine battalions of the Pakistan Army for the protection of China-Pakistan Economic Corridor projects, bringing total military spending to Rs817 billion.



That Rs817 billion number does not include the cost of military development programmes, nor that of military pensions, which would substantially increase the total spending on defence, reducing the fiscal space for civilian spending. The government is trying to create the space for that spending by increasing taxes on more affluent Pakistanis.



However, there are fears that the proposed levy may be challenged in the courts, since a similar tax – the Income Support Levy – imposed by the government in fiscal 2014 was struck down by the courts. Government officials familiar with the deliberations said the modalities of the surcharge were yet to be finalised.



An independent Tax Reforms Commission constituted by the government has also given almost a similar proposal in its report that has been shared with the government. The TRC has proposed to collect a higher income contributor surcharge to support Zarb-e-Azb and fight against terrorism for a period of three years. It defines a higher income contributor as a person who earns over Rs50 million annually.



The Pakistan Peoples Party government too had levied similar taxes. It had first levied a tax on the corporate sector alone, which was struck down by the courts. Then it levied a flood surcharge on all the salaried individuals.



While the government may have moral and legal grounds to levy the Operation Zarb-e-Azb Surcharge, its move is subject to criticism of overburdening existing taxpayers instead of broadening the base. The representatives of the industrialists and trade bodies have started publicly accusing the FBR of indulging in corrupt practices in the name of broadening the tax base.



Published in The Express Tribune, May 26th, 2015.