ISLAMABAD: In an article titled “Taxing the Savings of the Poor,” published in The News on July 17, 2021, Muhammad Ejaz-ul-Haq and Muhammad Tariq expressed a number of concerns regarding changes in tax policy applicable to income deposits and investments.
The article is misleading because it is based on a misunderstanding of the benefits available under the National Savings Schemes (NSS) and the tax regime applicable in the country. We would limit this response to policy changes, introduced in the budget and argue that the changes would have no impact on the income of investors in NSS.
One of the features of the new tax measures, announced in the budget, is the uniform treatment of all income, except capital gains, in order to bring fairness to the tax system. In fact, there is an improvement in the holdback regime for small investors. For income up to Rs5 million interest / profit, there is absolutely no change in tax payable. However, beyond Rs5 million, the rate of withholding tax and the applicable tax rates have been standardized with other sources of income. It should be noted that an investor, earning Rs 5million in interest income, would need a primary investment of at least Rs 50million for the whole year. We hope that the authors would not suggest that these people are poor. As a result, the change in tax regime has no implications for small investors, as the article claims.
Income exceeding Rs5 million will be subject to withholding tax (WHT) at the rate of 15% against the previous slabs of 15%, 17.5% and 20%. Obviously, the uniformity of the tax system has a rather favorable implication for the investors of NSS. However, the income is taxable at the normal rate, applicable to the individual taxpayer for which the tax rate, depending on the amount of income, can be up to 35%.
This policy change is justified for taxpayers who maintain deposits and investments of hundreds of millions. It is justified by the principle of equity where income from wages and businesses are taxed at much higher rates than income from deposits and investments. This is also in line with international best practice which shows that passive income like interest income is taxed at higher rates.
Addressing the concern about the alleged increase in the WHT from 10% to 15%, it is clarified that the applicable tax was already 15%, divided into withholding tax and final tax, the latter had to be filed with the return. This was combined and made a full and final settlement for the tax filer. This is an enhanced functionality for the simplicity of applicable tax for small investors. The authors have twisted the change in tax regime as a 50% increase in the applicable tax rate, a claim that is not supported by the facts.
In several places in the article, the authors alluded to the dilution of investor interest in SSN. There is no basis for making such a claim. The point is that there are 2.7 million valued investors in the NSS with a total investment of 3.9 trillion rupees, which is about 15% of the government’s domestic debt.
To encourage investments and instill savings habits, the government has taken the most extraordinary step of enabling retirees, seniors and families of Shuhada to enjoy tax-free income for investments in Behbood savings certificates. (BSC), Retirement Benefit Accounts (PBA) and Shuhada Family Welfare Account (SWFA).