KATHMANDU, June 29: The high-level tax reform committee has proposed a significant change to the social security tax system, suggesting the abolition of the existing one percent tax in favor of a progressive tax rate ranging from three percent to five percent.
Currently, a one percent social security tax is levied on the first slab of income for all earners, including workers and employees. This flat rate applies equally to all, regardless of their income level.
Illogical Raise in Direct Taxes
The committee has recommended a structural change where low-income earners contribute less, while higher-income earners contribute more. The new tax rates would be three percent for the next 10 years, and then to five percent thereafter. Personal income would first be reduced by deductible expenses, such as development funds up to Rs 500,000 or one-third of the income (whichever is less), and insurance expenses up to Rs 50,000.
For example, if your annual income is Rs 600,00, you currently pay Rs 6,000 as social security tax (1%). Under the proposed system, if your gross income is Rs 1,200,000 and you deduct allowable expenses (e.g., Rs 400,000 rupees for development funds and Rs 60,000 for insurance), your taxable income is reduced to Rs 740,000.
For income between Rs 700,000 to 900,000, a 10 percent income tax is applicable. Thus, one has to pay Rs14,000 in income tax on Rs140,000. The remaining amount of Rs 126,000 would be subject to a three percent social security tax, amounting to Rs 3,780. Compared to the current system, where one would pay Rs 12,000, this proposed system results in significant savings for lower-income earners.
The committee believes this change will make the social security system more sustainable by requiring higher contributions from those who earn more. Experts claim that this will help make the Social Security Fund stronger and more sustainable.
The proposed changes aim to create a fairer tax system that better supports the social security fund while providing relief to lower-income earners.
