Tax proposals for individuals need fresh review

In his budget speech, the Finance Minister was apologetic that he had to impose "net-worth surcharge" on the "income-based tax" of individual taxpayers, which, he admits, upsets the "fairness and equity" of the tax regime, but was forced to take the step since this was an easy way of increasing the tax revenue.
The "net-worth based surcharge" of 10 per cent was imposed in 2012-2013, but was raised to 15 per cent, 20 per cent and 25 per cent during the next two years. Actually, the "unfairness" affecting the individual taxpayers, started when the Finance Minister in the last year's budget raised the maximum tax rate of individuals from 25 per cent to 30 per cent for the first time in 20 years. The maximum rate of 25 per cent was fixed in 1993-94 and the successive finance ministers did not find any reason to make an upward revision of the rate.
As a matter of fact, the fairness of the tax regime for the individuals from FY 93-94 to FY 2012-2013 gave rich dividend over the years. The individual assesses' contribution to the exchequer which was only Tk 4.23 billion (423.20 crore) in 1993-94, when 25 per cent ceiling was fixed, rose to Tk 98.93 billion (9,893.24 crore) in 2010-11, to Tk 124.63 billion (12,463.81 crore) in 2011-12 and to Tk 167.12 billion (16,711.72 crore) in 2012-13. As a percentage of total tax revenue (both corporate and individual), the contribution of individual taxpayers increased from 24.82 per cent in 1993-1994 to 45.02 per cent in 2012-2013.
The Finance Minister might have gained some temporary benefit of higher tax revenue by imposing surcharge, but in the process he has lost the confidence of the individual taxpayers. At a time when there is all-round downward revision of the tax rates in the corporate sector on the premise that lower tax rates will not only widen the tax net but also help in attracting investments both within and without, the increase in the rates for individuals was a step in the wrong direction.
The imposition of surcharge based on net worth upsets the fairness and equity of the tax regime since there is little co-relation between the taxable income and the net worth of the assessee. Taxes arising out of high rental income from under-valued land and building, high dividends from shares acquired at the face value attracts no or very little "net-worth surcharge" as compared to the same tax  generated from income from treasury bonds, bank deposits, etc.
Conversely, poor dividend income from shares acquired at a high cost during the stock market boom may attract net-worth surcharge.
A highly paid executive may have negligible or no assets and therefore, does not come under the purview of "surcharge" at all. The disparity in the value of the income-generating assets give rise to imposition of surcharge ranging from 10 per cent to 25 per cent and result in dissimilar tax treatment of individuals with the same taxable income.
Apart from the question of fairness and equity, the simultaneous move to raise the tax rate from 25 per cent to 30 per cent and imposition of surcharge has resulted in a situation where the individuals' tax rate will be higher than that of corporate bodies. The individuals now feel the burden of higher tax and consider this unfair.
By raising the tax threshold from Tk 0.22 billion (2.20 lakh) to Tk 0.25 billion (2.50 lakh) (proposed), the loss of revenue is expected to be about Tk 3.0 billion (300 crore) [10 per cent of Tk. 30,000 x by the number of taxpayers]. In addition, the new proposed tax slab also will give rise to substantial loss of tax revenue to the exchequer, which is not intended.
For instance, for a taxable income of Tk 1.0 million (10 lakh), the new slab will result in loss of tax revenue to the extent of Tk. 13,500. For the taxable income of Tk 3.0 million (30 lakh), the loss of revenue will be Tk. 37,500.
Based on the above analysis, the Finance Minister may consider initiating the following action to restore the "confidence" of the individual tax payers:
(i)    Roll back the 30 per cent tax rate to 25 per cent as was prevalent during the last 20 years. In the short run, 30 per cent tax may be levied on income above Tk 10 million (1.0 crore);
(ii)    The progressive rate of surcharge going up to 25 per cent should be replaced by one rate of surcharge of 10 per cent on net worth above Tk 22.5 million (2.25 crore);
(iii)    The proposed tax slab may be redesigned to ensure that there is no further loss of revenue arising from raising of tax threshold from Tk. 2,20,000 to Tk. 2,50,000;
(iv)    Treasury Bonds should be excluded from the calculation of net worth. This measure will also help in making treasury bonds more popular;
(v)    Any other measure considered appropriate to restore the confidence of the individual taxpayer.
The writer is the first Finance Secretary of Government of Bangladesh.
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