Salaried class pays nearly 200% more tax than exporters, retailers

Pakistan’s salaried class paid Rs264.3 billion in income tax in the just-ended fiscal year – a sum that is nearly 200% more than the combined taxes paid by the country’s exporters and highly undertaxed retailers.

Data compiled by the Federal Board of Revenue (FBR) showed that during the fiscal year 2022-23, salaried persons paid Rs264.3 billion in taxes. The amount paid by the salaried class in taxes at up to a 35% rate was over Rs75 billion or 40% higher than the preceding year.

The salaried people were the fourth-largest contributors to the withholding taxes after contractors, bank depositors, and importers. The FBR has not yet officially released these figures.

In the last budget, the government had increased the taxes of the salaried class, which also became a reason for higher tax collection. Despite heavy taxation of the salaried class, coupled with history’s record highest inflation, the government again increased taxes on the salaried people earning more than Rs200,000 a month in this budget. Meanwhile, around 5,000 retailers were let off the hook by relaxing their registration conditions.

During the last fiscal year, the FBR collected over Rs2 trillion on account of withholding taxes, which were equal to 61% of the total income tax that the FBR generated in the previous fiscal year. However, the details suggested that the withholding tax collection, particularly at double rates from the non-filers of the returns, has become an easy source of revenue collection for the FBR.

Chasing existing taxpayers for more while allowing the informal sector to grow is akin to killing the goose that lays the golden egg, according to the Salaried Class Alliance. The maximum amount of income tax collected was from contractors, saving account holders, importers, salaried persons, electricity bills of the non-filers, telephone & mobile phones users, and dividend income, as shown by details compiled by the FBR. The other major revenue spinners were taxes on the purchase and sale of properties, exports, foreign income fee, brokerage commission, and registration of cars.

However, exporters and retailers combined pay Rs175 billion less tax than the salaried class, according to the provisional numbers. The total income tax paid by exporters and retailers was Rs89.5 billion in the last fiscal year, which was Rs175 billion or 196% less than the income tax paid by salaried persons.

Exporters who earned $27.7 billion in the last fiscal year paid a meagre sum of Rs74 billion in taxes. Their contribution in taxes was 17.4% higher than the preceding year, but it was lower than the increase in their income in rupee terms. Exporters pay only 1% of their gross receipts in the income tax. But exporters’ representatives claimed that their effective rate was almost equal to the salaried class maximum rate of 35%. The claim is not independently verified.

Similarly, at the rate of 0.5% advance tax on sales to retailers, the FBR pooled mere Rs15.6 billion from the retailers in the last fiscal year. It was probably the lowest contribution by any income group. The share of retailers and wholesalers in the total size of the economy was around 19%, but their share in total income tax was mere 0.4%.

The IMF is also wrongly putting more burden on the salaried class, which, unlike the exporters and retailers, does not have a voice in the power corridors.

Tax collection from contractors and service providers jumped by 3% to Rs391 billion in the last fiscal year. While this is the single largest income tax collection head, the FBR does not have any role in it.

The collection on account of profit on debt jumped 106% to Rs320 billion in the last fiscal year. The increase suggests the impact of higher interest rates and people’s tendency to save money. Banks charge 10% to 50% income tax rates on these savings accounts on behalf of the FBR.

Importers paid Rs290 billion in income tax on various types of imports – the third-largest contributor to withholding taxes.

Published in The Express Tribune, July 26^th, 2023.

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