High-Level Tax Reform Committee Proposes Progressive Social Security Tax
The high-level tax reform committee has recommended a major overhaul of the social security tax system, proposing to replace the existing one percent flat tax with a progressive tax rate ranging from three to five percent. Currently, all earners, including workers and employees, pay a flat one percent social security tax on their first slab of income, irrespective of their income level. The committee's proposed changes aim to introduce a more equitable system where contributions are based on income, thereby requiring higher-income earners to contribute more while reducing the burden on lower-income earners.
Under the proposed tax rates, the initial rate would be set at three percent for the next ten years, increasing to five percent thereafter. In addition to the new rates, the committee has suggested several deductions to reduce taxable income. These deductions include development funds of up to Rs 500,000 or one-third of the income, whichever is less, and insurance expenses up to Rs 50,000.
For example, under the current system, an individual with an annual income of Rs 600,000 pays Rs 6,000 as social security tax (1%). With the proposed system, an individual with a gross income of Rs 1,200,000 who deducts Rs 400,000 for development funds and Rs 60,000 for insurance expenses would have a taxable income of Rs 740,000. Income between Rs 700,000 to Rs 900,000 is taxed at 10%. Therefore, the individual would pay Rs 14,000 in income tax on Rs 140,000, with the remaining Rs 126,000 subject to a three percent social security tax, amounting to Rs 3,780. This results in significant savings compared to the current Rs 12,000 social security tax.
The proposed progressive tax system aims to make the social security fund more sustainable by increasing contributions from higher earners. Experts believe that this change will strengthen the Social Security Fund and ensure its long-term viability. The committee's recommendations are intended to create a fairer tax system that provides relief to lower-income earners while better supporting the social security fund.
Overall, the proposed changes are seen as a move towards a more equitable and sustainable social security system that aligns contributions with the ability to pay. The high-level tax reform committee's recommendations reflect a commitment to improving the financial health of the social security system while ensuring fairness for all earners.
