Currently a debate has sparked on the proposed imposition of minimum income tax worth Tk 2,000 on a marginalised tax payer. This scribe has tried to make an effort to understand the consequence of the minimum tax.
Suppose an individual's monthly gross salary income is Tk 37,500. The individual earns two basic salaries as festival bonus. House rent, transport and medical allowance are included in the monthly gross salary. The individual does not have any other income. So, this individual is not required to pay any tax as per the current tax law. But, as per the proposed provision, such an individual will be required to pay Tk 2,000 every year as income tax with the submission of the tax return even though his or her income does not exceed the threshold.
Again, let as assume that Mr Karim is a retired official and has invested Tk 3 million in national savings certificates (NSC). His earning is Tk 300,000 as profit from this investment. He is not supposed to pay any tax except 10 per cent at source. Thus, Tk 30,000 is deducted at source from the profit annually. So, he will not be required to pay any further income tax since his tax deducted from the profit of NSC is higher than minimum tax. Thus, the proposed provision is not going to affect this type of tax payers.
Usually, when people start depositing their money in the bank account, they earn interest income. If they invest in shares of publicly listed companies, they earn dividend income. All these incomes are subject to withholding tax or tax-at-source. Hence, these individuals will not be required to pay Tk 2,000 at the time of filing their return as the minimum amount has already been deducted from their income.
Question may also come as to who will be required to submit Proof of Submission of Return (PSR). As per last Finance Act, recipient of 38 services will be required to file PSR. If an individual does not require those services, they can still remain out of the net.
How many tax-filers file zero tax return? As per the latest assessment year, an estimated around 200,000 tax payers filed tax return paying no taxes. So, if they pay Tk 2,000 per file, total contribution would be Tk 400 million. The amount is tiny. The idea behind the proposal is probably to develop the culture of tax payments and compliance. This may be a sustainable financial system since in order to maintain their database, develop and maintain system for their filing, monitoring, follow up and PSR update, government needs to spend other tax payers' money. So, the tiny collection is likely to offset the payment required to maintain it.
As per the latest available information, tax earned per return in 2019 was Tk 143,942. This was reduced to Tk 112,975 in 2021. Now, the minimum tax will increase the earning to some extent. Recently the Appellate Division of the Supreme Court has legitimised the concept of minimum tax that corporate pay.
The objective of the income tax thresholds is to protect an individual whose income does not exceed certain amount. The slab rate is introduced for collecting more taxes from higher income people. So, the principle of tax exemption for people below the threshold will be compromised, if the minimum income tax becomes mandatory.
First there was Covid-19 pandemic followed by the Ukraine-Russia war, resulting in substantial price hikes causing much trouble to low and fixed income people. Now, they will face an additional burden of tax.
The government needs to think about the introduction of the minimum tax on individual since there is a tax-free limit. Instead of imposing the minimum tax for all, it may introduce a smaller rate of tax for the initial slab, tax-free slab, since tax deduction at source is universal.
Snehasish Barua, FCA is Partner, Snehasish Mahmud & Co, Chartered Accountants.