Weekly Commentaries

This is Sunday Chronicle's weekly commentaries on various issues of interest affecting the country. All individual commentators are done by elite Papua New Guineans from diverse educational backgrounds.

Monday, March 01, 2010

Enjoy tax advantages available to the informal sector

                             BE YOUR OWN BOSS
-TIRI KUMBAKUL

THE INFORMAL sector in Papua New Guinea is so large and worth millions that the government passed the Informal Sector Development and Control Act 2004 which recognises the importance of the sector and provides guidelines and regulations within which it should operate.

What the law requires is that people in the informal sector can operate any informal business as long as they abide by sanitary and other regulations. Such people are not required to lodge returns to authorities, or to pay taxes on the income they earn. This is another important reason why people in our country need to seriously consider becoming self-employed.

In my view, the Act provides the best opportunity for the
thousands of unemployed people in the country to become
meaningfully engaged in economic activities. The informal
sector has the capacity to accommodate the thousands of
school leavers exiting the education system every year. It
provides the best option for those who out of frustration
and hopelessness have turned to crime and other anti-social
activities, to earn an honest living and contribute as
productive members of society.


The higher you rise up the ladder, the more tax you pay

What people who are looking for jobs do not realise is that
those who work for wages and salaries pay a lot of money in
income tax. The harder they work and the higher they rise up
the corporate ladder, the higher they rise up the tax
bracket, and therefore the more income tax they become
liable for. Every time they get a pay rise, the government
gets a raise. Every time there is an upward adjustment due
to the CPI, the government gets an upward adjustment.

Let us look at some actual figures. According to the 2008
Income Tax Schedule effective from 1st January 2008, the
following tax rates applied for people who had no dependents
and had lodged their tax declarations:

  • Where fortnightly income exceeds K800, tax is calculated as K123.08 plus 30 toea for every kina by which income exceeds K800. In other words, if you receive K900 per fortnight, your income tax will be K123.08 + (K900-K800) x 0.30 = K123.08 = K100 x 0.30 = K123.08 + K30 = K153.08.
  • Where fortnightly income exceeds K1,277, tax is calculated as K266.18 plus 35 toea for every kina by which income exceeds K1,277. You can calculate how much a person earning K1,500/fortnight would pay using the procedure given above.
  • Where fortnightly income exceeds K2,700, tax is calculated as K764.23 plus 40 toea by which income exceeds K2,700. Try calculating how much someone earning K3,000 would pay.
  • Where income exceeds K9,623, tax is K3,533.43 plus 42 toea for every kina by which income exceeds K9,623. If you are a "top shot" whose gross salary is K10,000 per fortnight, your income tax would be K3,533.43 + K377 x 0.42 = K3,355.43 + K158.34 = K3,691.77. So you would be paying that much out of the gross figure of K10,000, meaning that 37% of your income would be going out as income tax. Note that the Income Tax Act defines taxable income as "salaries, wages, commissions, bonuses, remuneration of any kind, whether at piece work rate or otherwise, in respect of or in relation to the employment of that person as an employee." It covers every conceivable income employees can earn. Benefits such as motor vehicles and housing are taken as part of the employee's remuneration and taxed in full. If allowances are paid in lieu of these benefits, the amounts are added to salaries for tax purposes.

Basically what this means is that people who work hard for their employers receive pay rises and improved benefits which places them at higher tax brackets, with the result that they pay more tax. The gross salaries and other benefits may look very enticing but what employees actually take home may not be that impressive when tax is factored in. All employees in fact work for the government without realising it.

Let me state at this juncture that paying taxes is not necessarily a bad thing. As responsible citizens, we all
need to contribute towards meeting the costs of developing our country. When we work, either for others or for ourselves, we contribute to nation-building. When we pay taxes, we empower the government to provide us services, build good roads, schools, hospitals, make laws etc.

But did you know that not everyone pays income tax? Did you know that the law allows some people to legally minimise their taxes or even avoid paying taxes at all even though they make a lot of money? Did you know that some people are given "tax holidays" by the government? Did you know that the already rich and well-to-do are given "tax concessions", "tax rebates" and "tax credits" which are not available to employees?

The personal income tax system is based on the PAYE principle, which means "pay as you earn". What this
effectively means is that you are taxed on your gross income before you make any deductions for the costs you have incurred in earning that income. Such costs might include rent for the house you are living in, or fuel and maintenance for your vehicle which you use to travel to work, the clothes you wear or the food you eat to keep yourself alive and working.

Under the PAYE system, you pay your income tax before you meet your living expenses. And to make it easy for you as well as to ensure that you do pay up, the government has directed your employer to deduct the tax the moment you get paid. So what happens is that the government gets its tax income from your salary before you see the pay you have sweated yourself for. The employer issues you a pay slip showing how much your gross income has been, and the deductions such as tax and superannuation.

If you take account of the 10% GST you pay every time you buy something from the shop or pay for a service such as electricity and telephone, and the 15% withholding tax you pay for interest you earn from your savings, the government probably ends up with close to half of the income you earn!

I have determined that most employees work between 3 and 5 months of the year just to pay their taxes without realising that this is happening.


The self-employed work 100% for themselves

When you become self-employed, you work 100% for yourself. If you are in a business considered as informal, you are not required to register yourself with the Investment Promotion Authority or the Internal Revenue Commission.  You are not required to report ur earnings to anyone. This means that
your gross income becomes your net income. For example, if you are into farming, street sales, second hand clothes at the local market or even running a PMV or a taxi, the government does not require you to report your earnings. What you earn is all yours to keep and invest as you like. That is the beauty of being self-employed.

Have you noticed that small business people seem to have
more money in their pockets or bank accounts compared to
people who work for salaries and wages? Have you wondered
how uneducated self-employed people can buy land and build
their own houses whereas those working for the government or
private companies cannot afford to do so? How come
self-employed people who are relatively uneducated travel
around in good vehicles while well-educated employees own
rundown and unroadworthy vehicles or compete with the
grassroots for seats on public transport all their lives?
How come self-employed people travel overseas regularly while
people who have paid jobs cannot even pay for a holiday to
another part of the country? How come employed people borrow
money from street sellers?

I submit to you that income tax is one major reason. The
self-employed pay little or no income tax and get ahead
financially, while employees get hit with tax which can
amount to large sums. In fact, when you think about it,
income tax is probably the largest single expense paid by
those who work for others. It keeps them struggling all
their working lives.

Employed people work more for their employers, the
government, their debtors and suppliers of goods and
services, and less for themselves. They work for other
people so much that what they have left with them at the end
of a fortnight is very little. So they go back to work again
because for many of them, one missed fortnight means
disaster.

For the employed, pay Friday is payday; for the self-employed any day is payday

In PNG you can tell when it is government or company payday.
You see long queues at banks and shopping centres,
especially on pay Fridays. You can sense life and vitality
in people. You walk into a shop and you feel like you have
entered a bee hive. You also see many relatives in town, as
if they have been working too and have come to collect their
pay.

If you ask a self-employed person whether a certain Friday is
payday, he will scratch his head and tell you that he does
not know. He is telling the truth, because Friday as a
payday is not part of his mindset. For him, any day is
payday! His income is irregular. Sometimes he makes nothing
at all; other times he makes a lot for which he may not pay
any income tax. His lifestyle seems risky to people who are
used to living on regular fortnightly pay. But that is the
way the self-employed live.

I can tell you from experience that it is more exciting and
rewarding being self-employed than living the monotonous,
routine and boring kind of life which employed people live.

Next week's article will look at the tax advantages that are
available to people who have their own companies.

Your comments can be sent to secos@global.net.pg or text me on
76880033 or 72804588.

No comments: