By Rusiripala Tennekoon –

There is an important aspect of our present tax structure that deserves serious public discussion. The highest rate applicable to the corporate sector is 30%, with the higher 40% rate applying to specific sectors such as liquor and gambling. Corporate profits distributed as dividends may, in turn, be subject to taxation in the hands of the recipients.

Against this background, it is worth asking whether it is reasonable for an individual taxpayer to be pushed into a 36% marginal tax slab simply because different sources of income are aggregated.

Consider an individual who earns an employment income while also receiving rental income from property accumulated over a lifetime. Or consider a pensioner who, after decades of employment, receives a pension together with some rental income or other continuing return from assets accumulated through past earnings.

These sources of income have very different economic characteristics.

A salary is income earned through present employment. Business income represents current enterprise and risk. A pension represents the fruits of past employment. Rental income may represent the return on capital accumulated over many years.

Yet, when these different sources are aggregated for tax purposes, an individual may be pushed into the highest 36% slab.

This raises a fundamental question of tax fairness.

A pensioner who has reached old age and is living on a pension earned through a lifetime of employment, together with modest income from assets accumulated through his own savings, should not necessarily be treated in the same manner as a person generating a high level of fresh income through current employment or business activity.

The answer need not be a blanket exemption from taxation.

The better solution may lie in revisiting the method of computation.

For example, current employment or active business income could be assessed separately from qualifying retirement income and income arising from accumulated assets, with appropriate safeguards to prevent abuse. Such a method could ensure that a pensioner is not pushed into the highest marginal slab merely because his pension and modest passive income, when mechanically aggregated, cross an arbitrary threshold.

This would not mean giving pensioners an unfair privilege. It would simply recognise the economic distinction between income earned today and income earned from the work and savings of yesterday.

There is also a broader policy issue here.

A tax system should not be designed merely to maximise the amount collected from each individual taxpayer. It should also encourage employment, enterprise, investment, saving and responsible financial independence in old age.

A person who has worked throughout his life, saved for his retirement and is able to live independently without becoming a burden on society should not be penalised merely because his pension and modest continuing income happen to take his aggregate income into a higher tax slab.

The objective should be a tax system that is progressive, but also economically rational and socially just.

Taxation should recognise economic realities—not merely add different sources of income together and apply a higher rate.

Equity in taxation is not about giving privileges. It is about recognising the difference between income earned today and income earned from the work and savings of yesterday.

Policymakers should scrutinise tax proposals—not merely endorse them.