Individual taxpayers' tax credit calculation will change as per the proposed Income Tax Act 2023, which will also impact the benefit of the taxpayers, mainly among the higher income earners. Low and middle income earners will have no negative impact when the new law comes into effect.
The changes in tax rebate and investment allowance are common and expected because each year a few changes are made through finance bill. And the main purpose of those changes is to increase the government revenue.
However, the proposed changes being very clear will help individual taxpayers to calculate taxable income by the salaried persons. According to the existing Ordinance, individual taxpayers are required to follow two steps to calculate the tax rebate; first calculate the investment allowance at 20 per cent of taxable income and then 15 per cent of such investment allowance. Now, you have to calculate directly using the 3 per cent of taxable income.
According to the existing tax Ordinance, the maximum ceiling of investment allowance is Tk 10 million and the tax rebate at 15 per cent on such amount is Tk 1.5 million. But now, according to the proposed Act, the maximum tax credit limit will be Tk 1 million instead of Tk 1.5 million, which means they will lose Tk 500,000. So, their tax liability will increase by Tk 500,000. Additionally, their investment areas will also be capped by the proposed Income Tax Act 2023. In the tax law, there are very few investment areas like Deposit Pension Scheme (DPS) with any scheduled bank or financial institute, government securities (savings certificate or government bonds), shares and mutual funds in capital market, life insurance and provident fund (PF) for the employees.
There is a limit of Tk 60,000 for DPS which is proposed to be extend to Tk 120,000. The existing Ordinance has no limit for the investment in government securities and mutual funds but the new act proposed to limit the investment up to Tk 500,000 for each such investment which will impact the investment plan of the higher income earners.
These changes will not impact the low and middle income earners because the proposed ceiling will cover the investment allowance requirement if they are determined to invest only in the government securities and DPS where they are getting a total of Tk 620,000 (government securities Tk 500,000 and DPS Tk 120,000).
The taxpayers who have taxable income of more than Tk 3.1 million (Tk 620,000/20 per cent) have to revise their investment plan to avail the tax credit benefit. So, those who require to invest more than Tk 620,000 have the option to invest in life insurance, shares and mutual funds in the capital market.
Compared to these three-options, life insurance is better than other two options considering the high risk due to volatility of the capital market. However, there is a negative impression in investors' minds about life insurance. They are found apprehensive about getting the insured amount after maturity. The insurance companies need to be positive to build the trust in investors' minds to collect these additional investments from the higher income earners.
The ceiling on investment may have three impacts. One, more investment will go to the life insurance companies who have the goodwill with the client for payment of investment on maturity. Second, the investors who are risk-takers will invest in shares and mutual funds in the share market. And the last one includes those who tend to avoid high risk and will stop investing in capital market. They may consider losing tax offset amount avoiding investments in high-risk areas. If the losing offset amount is not significant in terms of return, then they may surrender the tax credit benefit to avail high return by investing in secured investment sectors.
Investors want high return by investing their money in the most secured investment sectors and till now government issued savings certificates are one in terms of return and security. The government also collects loans using these instruments. The bar to investment in government securities may reduce loan collection by the government and this may push the government to borrow from banking sectors.
We have talked about the investment areas to grow money as well as to reduce the tax liability. Taxpayers may also reduce their tax liability by donating in the particular areas as mentioned in the tax law. These options will reduce tax burden as well as help society.
However, one question may raise: why is the National Board of Revenue (NBR) not thinking about changes in the law for the middle income people? The reason may be that this class of taxpayers' tax liability is not big and, mostly, after considering the tax rebate amount, the tax liability goes down into the negative and sometimes below the minimum tax threshold. So, the NBR has realised that the changes for this group will not impact the tax collection amount.
Considering the above issues, the higher income people will make a new investment plan to find out where the investments will be made to get the maximum tax credit benefit to reduce their tax liability.
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