Zafar Iqbal

Pakistan’s Salaried Class Bears Unprecedented Income Tax Burden, Faces Further Increases in New Budget

The salaried class in Pakistan, often considered the silent majority, has seen an unprecedented surge in their income tax burden in the just-concluded fiscal year. Their contributions have soared to a record Rs368 billion, a staggering 232% increase compared to the combined taxes paid by exporters and retailers. Despite this substantial tax contribution, the government, in partnership with the International Monetary Fund (IMF), has chosen to raise the income tax rates for this group in the new fiscal budget, effective from July. This move is expected to significantly reduce the take-home pay of many salaried individuals from August.

Figures released by the Federal Board of Revenue (FBR) highlight the substantial financial burden shouldered by salaried taxpayers. In the fiscal year 2023-24, salaried individuals collectively paid a whopping Rs367.8 billion in income taxes, signifying a notable 39% increase amounting to Rs104 billion compared to the previous year.

Despite their significant contribution, salaried individuals find themselves bearing an unfair burden. The additional income tax paid by salaried persons in the last fiscal year almost matched the combined Rs111 billion income tax paid by the most affluent exporters and highly influential traders. Yet, salaried individuals ranked fourth in terms of contributors to withholding taxes, trailing behind contractors, bank depositors, and importers. This disparity in tax burden highlights the need for a more equitable taxation system.

The government’s decision to increase income tax rates for salaried individuals and impose a 10% surcharge on the highest 35% income tax bracket in the fiscal year 2024-25 is expected to significantly burden the already overburdened salaried class. The FBR anticipates an additional Rs85 billion in revenue from salaried individuals in the current fiscal year, pushing their total contributions to over Rs450 billion by the end of the fiscal year.

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Government officials have indicated that the IMF has underscored the indispensability of salaried individuals as a consistent revenue source for the FBR. According to a senior bureaucrat who preferred to remain anonymous, the IMF has linked any reduction in income tax rates for salaried individuals to the government’s capacity to raise revenues from alternative sources. This stance has raised concerns about the disproportionate burden shouldered by the salaried class, especially when compared to exporters and retailers who seemingly wield greater influence in policy-making circles.

The FBR’s data also reveals that salaried individuals are not only subject to direct income tax but also to several other withholding taxes. These include taxes on electricity bills, telephone and internet connections, and transactions made using credit and debit cards for international purposes. This comprehensive view of their tax obligations underscores the multiple layers of taxation that salaried individuals face.

Unveiling a stark contrast in tax contributions, the data further illustrates that exporters and retailers collectively paid Rs257 billion less tax than the salaried class in the last fiscal year. Specifically, the income tax paid by exporters and retailers amounted to Rs111 billion, lagging significantly behind the taxes paid by salaried persons by an astonishing Rs257 billion or 232%.

Addressing the specific contributions from various sectors, it is revealed that exporters, despite earning $30.6 billion in the last fiscal year, only paid a modest Rs93.5 billion in taxes, representing a mere 27% increase of Rs20 billion from the preceding year. Notably, the government terminated the fixed-income tax regime for exporters and placed them under the standard tax regime in the recent budget.

Furthermore, tax collection data indicates that the FBR collected Rs17.3 billion from retailers through a 0.5% advance tax on sales in the last fiscal year. Additionally, distributors paid Rs 9.5 billion in income tax during the same period. Although the government recently implemented a new income tax regime targeting retailers, it notably excluded the majority of traders from this framework, thereby drawing attention to the uneven taxation landscape within the commercial sector.

The FBR’s comprehensive analysis also highlights a substantial increase in tax collection from contractors and service providers, reaching Rs498 billion in the last fiscal year, making it the largest contributor to withholding taxes. Another key facet is the 52% surge in the collection of profit on debt, amounting to Rs488 billion in the same period, attributed directly to escalated interest rates. Importantly, importers contributed Rs381 billion in income tax, emerging as the third-largest contributor to withholding taxes.

Upon comprehensive review, it becomes clear that while the salaried class has diligently fulfilled its tax obligations, the burden placed upon them is disproportionate when compared with other segments of the economy. The current taxation policies underscore the urgent need for a fair and equitable system that comprehensively considers the contributions and capacities of all entities, alleviating the undue strain currently borne by salaried individuals.