The Tax Review Committee has recommended the government to broaden the personal and corporate income tax in order to reduce the income tax rates.
Chairman Sir Nagora Bogan when presenting the Taxation Review to the Treasurer Patrick Pruaitch today, says the review recommends that the current tax free threshold of K10,000 be increased to K20,000 as the budget condition allows.
He said the cost to revenue of a threshold of K20,000 is estimated to be about K560m assuming no other changes to marginal tax rates.
He said increasing the tax free threshold to K15,000 is estimated to cost K283 million.
The committee found out that the wage and salary increases since 2012 had seen a significant number of low income taxpayers become subject to tax.
Sir Nagora added that without change to the tax free threshold, the average tax paid by wage and salary earners would increase as wage levels rose.
The tax free threshold also has an important role in overall fairness in the income tax system as it provides greater tax relief, as a percentage of income, to lower income earners.
“Increasing the threshold to K20,000 will have substantial benefits in reducing the income tax burden on taxpayers as well as removing about 40 percent of taxpayers from the income tax system.”
However, Sir Nagora says a tax free threshold of K20,000 will come at a large revenue cost that may not be immediately affordable.
He said as a more affordable interim step, the tax free threshold should be increased to K15,000.
“A K15,000 threshold will still have important simplification benefits as it could remove up to a third of current taxpayers from paying income tax and will improve the administrative simplicity of personal income tax,” Sir Nagora explained.