Income Tax Bracket causes confusion galore

An attempt by the Ministry of Finance (MoF) to be transparent in the Personal Income Tax slab in the Income Tax Amendment Bill 2020 lead to people scratching their heads.

The confusion was caused because instead of giving the usual Income category and the Tax that is applicable the Department of Revenue and Customs (DRC) under MoF also put the entire tax amount payable by calculating the entire tax payable in the lower bracket and then adding it to the higher bracket.

The earlier tax exemption limit of Nu 200,000 being increased to Nu 300,000 was easily understood by most. This simply means that the first Nu 300,000 of your annual income will not attract tax.

In other words, if you earn anything at or below Nu 300,000 a year then there is no PIT tax for you but if you earn Nu 500,000 a year then the first Nu 300,000 will not be taxed.

The first taxable slab of Nu 300,001 to Nu 400,000 was also relatively simple as the DRC box in the report says it will attract a 10% tax for any income exceeding Nu 300,000.

However, the confusion started from the next slab of income above Nu 400,001 to 650,000 where the box says it is Nu 10,000 plus 15 percent of the amount by which the total taxable income exceeds Nu 400,000.

 

Quite a few assumed that the Nu 10,000 above was an additional lump sum tax over and above the 15 percent tax on this category.

However, the Finance Minister Lyonpo Namgay Tshering said that the Nu 10,000 is to only show what was paid as 10% in the first taxable slab of Nu 300,001 to Nu 400,000.

This is to show in figures somebody taxable in the Nu 400,001 to 650,000 has already paid in the previous slab of Nu 300,001 to Nu 400,000.

He clarified that it does not mean that this person has to pay an additional lump sum tax of Nu 10,000 as the 10,000 was already paid in the previous slab but it is only show the total amount payable (see boxes on pg 3).

Similarly, the third taxable slab of Nu 650,001 to Nu 1 mn says the tax rate is Nu 47,500 plus 20 percent of the amount if  the taxable income exceeds Nu 650,000.

Here again, the minister clarified that the Nu 47,500 is not additional lump sum tax but is to show how much people in this category has paid taxes in the previous two slabs which is Nu 10,000 in the first taxable slab and Nu 37,500 in the second slab which is the 15% tax on Nu 250,000 which is the difference between Nu 400,001 and Nu 650,000.

This continues is the tax slab of income from Nu 1 mn to Nu 1.5 mn and income above Nu 1.5 mn.

The minister explained that the PIT slab had to structured like this for the Parliament to show exactly the tax being paid as it is also a Bill.

What this means is while in the current PIT tax system the exemption slab is Nu 200,000 with 10% tax for Nu 200,001 to Nu 250,000, 15% tax for Nu 250,001 to Nu 500,000, 20% tax for Nu 500,001 to Nu 1 mn and 25% for above Nu 1 mn – the new proposed PIT slab is exemption for income up to Nu 300,000 with 10% tax for Nu 300,001 to Nu 400,000, 15% tax for Nu 400,001 to Nu 650,000, 20% tax for Nu 650,001 to Nu 1 mn, 25% for above Nu 1 mn and 30% for income above Nu 1.5 mn.

This, in short, means that if a person earns Nu 1.3 mn a year the first Nu 300,000 of her or his income is exempt leaving a taxable income of Nu 1 mn.

Of this taxable Nu 1 mn his first 100,000 will attract 10% tax, his second Nu 250,000 will attract 15% tax, his third Nu 350,000 will attract 20% tax and his final 300,000 will attract 25% tax.

This means his total PIT payable will be Nu 10,000 + 37,500 + 70,000 + 75,000 = Nu 192,500 per year.

However, if there is someone who earns even more than the above person and his PIT payable every year is Nu 1 mn or above then a 10% surcharge will be charged on this PIT amount.

Which means if a high income person has paid Nu 1 mn in PIT tax then he has to pay and addition Nu 100,000 as surcharge.

In the end the new tax rate clearly shows that the tax burden on the lower income group earning Nu 300,000 or less is not only lifted but its also significantly reduces the tax burden on the middle income group with benefits to the slightly higher income group as well.

However, the tax has been raised quite a bit for the very high income group or the ‘rich’ and ‘ultra-rich.’

In what will come as relief to parents the allowable deduction for education expenses has been increased from Nu 150,000 to Nu 250,000 per year.

The minister said that this is being done because the earlier amount is outdated and the government is serious about its education policy.

The pension income is also exempt from PIT. The minister said that while there are more than 700 people receiving pension around 411 who have to pay PIT will benefit. The PIT reduction and exemption will lead to a lesser revenue of Nu 252 mn a year. PIT in the 2019-20 budget was forecast to be Nu 1.832 bn.

This is because there are not many people in Bhutan earning above Nu 1.5 mn a year which faces the increased tax.

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