IMF tax proposals to make salaried class worse off

The International Monetary Fund (IMF) has proposed tapping the upper middle class and wealthy people having income in the bandwidth of Rs104,000 to Rs1 million a month by taxing them at the uniform rate of 30%.

The proposal indicates inequity in taxation and if accepted has the potential of leaving the majority of the salaried class worse off amid a biting, double-digit inflation.

The proposal also seems unjustified as it equates a person earning Rs100,000 with the one who has 10 times more income and can afford to pay 30% or Rs300,000 every month in taxes.

“Pakistan has not accepted the IMF’s proposals yet due to its adverse political, economic and social impacts,” sources in the Federal Board of Revenue told The Express Tribune. The proposed rate would net additional revenue to the tune of Rs96 billion, bringing the total taxation from individuals to around Rs220 billion.

The sources said in addition to this, the two sides could not converge on the issue of levying tax on pensioners. The IMF has been asking for the pensions to be taxed, either at the contribution or at the withdrawal stage.

About 1.24 million salaried persons have filed income tax returns for the tax year 2021 and out of those 333,000 fall in the income tax exemption slab of Rs50,000 per month.

The government has shared its revised tax slabs for individuals - both salaried and business class - with the IMF that are higher than the existing rates but do not put major burden on the middle and upper middle income groups.
The sources said that the IMF had proposed that the people earning in the range of Rs50,000 to Rs62,500 a month should be taxed at the rate of 5%. This is being charged from the people earning up to Rs100,000 a month currently.

For the middle income group having monthly income of up to Rs79,000, the IMF has proposed 10% income tax rate, which is currently charged to only those who earn Rs150,000 a month.

“The IMF has come up with the proposal to slap 20% tax rate on monthly income of below Rs104,000,” according to the sources. The 20% tax rate is currently charged from the people earning nearly Rs417,000, indicating a massive increase in the tax burden of the middle income groups.

Inflation in Pakistan recorded at 12.3% last month, which is the highest in South Asia and one of the highest in the world. People are exposed to a massive wave of inflation due to surge in the global commodity price and depreciation of the rupee against the US dollar that has lost 49% of its value.

The government’s decision to first export sugar and wheat, and then import these commodities also caused imported inflation. There was also an administrative increase in the prices of electricity and petroleum products due to taxation and on the demand of the IMF.

The IMF’s most aggressive proposal was to slap a uniform rate of 30% on people having monthly income in the range of Rs104,000 to Rs1 million, said the sources. The measure are estimated to cough up Rs160 billion for the FBR.

The proposal is unjustified and unfair and cannot be accepted, according to a person familiar with the outcome of the talks that remained inconclusive.

The 2019 Household Integrated Economic Survey (HIES) revealed that, households of the richest quintile are having average income almost three times the income of the lowest quintile of households in urban and rural areas. The gap between the lowest and the highest quintiles is more pronounced in urban areas, according to the PBS survey.

Currently, the 30% tax rate is charged from those who earn Rs4.1 million a month.

For the people earning over Rs1 million a month, the IMF has proposed 35% income tax rate but it will hardly affect 6,000 persons. “The total tax collection from this group amounts to around Rs45 billion,” said the sources.

Compared to the IMF-proposed rates, the sources said, the government has proposed that for the people earning up to Rs100,000 a month, the tax rate should be 10%, which seems reasonable but higher than the existing rates.

For those who earn over Rs100,000 to Rs333,000 a month, the FBR suggested 15% income tax rate which also seems affordable, although the rate is charged from those who earn over Rs208,000 a month.

The FBR has proposed that the tax rate for those earning up to Rs666,000 should be 20%. According to the FBR recommendation, the tax rate for the people earning up to Rs1.25 million a month should be 30%. It has recommended 32.5% rate for those earning Rs2.5 million a month and 35% for the ones having monthly income of above Rs2.5 million.

Currently, the 35% rate is charged from those who earn over Rs6.25 million a month.

IMF talks hit dead end

The talks between Pakistan and the IMF hit a dead end after the latter refused to accept the government’s decisions to give a blanket tax amnesty scheme to industrialists and a relief package for worth Rs246 billion.

However, the Ministry of Finance on Thursday claimed that “negotiations under the 7th review are continuing as planned and the two sides remain engaged on a regular basis at a technical level through virtual meetings and data sharing”.

The finance ministry said that the focus of the IMF negotiations has been on the agreed targets between the two sides, as well as the recently announced relief and industrial promotion packages.

There is a consensus that all the end-December agreed targets have been achieved, while progress on other actions mentioned in the Memorandum on Economic and Financial Policies (MEFP) for the 6th review has also been found to be satisfactory, it added.

Read: IMF proposes high income tax

On the relief package, complete details, including financing options, have been shared with the IMF and a general understanding has been developed. The IMF has, however, indicated the need for some further discussions on the industrial promotion package over the next few days.

“An understanding is expected to be developed on the said package subsequent to those discussions,” according to the finance ministry.

It said that upon completion of the technical talks, the text of the Memorandum on Economic and Financial Policies (MEFP) for the 7th review will come under discussion.

The statement is tantamount to an admission that the talks were not progressing, as both the sides could not even begin discussions on the MEFP considered to be a policy document for the programme purposes.

“The government is confident that the finalisation of the MEFP would lead to the IMF Board meeting towards the end of April. The government remains committed to completing the IMF programme successfully in September.”