Talks with IMF end without agreement

Disagreement persists over ‘irrational demand’ for high taxes on salaried class

Shahbaz Rana June 09, 2024


Another round of discussions between Pakistan and the International Monetary Fund (IMF) has ended inconclusively due to disagreement over new income tax rates for salaried and non-salaried persons and the imposition of standard 18% sales tax on agriculture and health sectors’ goods.

Discussions are revolving around whether to charge a new backbreaking 45% income tax from salaried and non-salaried individuals on a monthly income of just over Rs467,000, according to sources. At present, the maximum rate of 35% is applicable to a monthly income of over Rs500,000. However, both sides have converged on the issue of increasing the income tax burden on exporters in the next budget who paid a paltry sum of Rs86 billion this year, which is 280% less than the taxes paid by the salaried people. Pakistan also showed willingness to tax pensions beyond a certain income threshold.

Pakistan and the IMF authorities on Friday held discussions on the outstanding issues related to taxation and the energy sector. Sources said that both sides could not resolve their differences on the income tax threshold, the merger of salaried and non-salaried rates and the maximum income tax for individuals.

The IMF insisted on merging the slabs related to salaried, non-salaried and other incomes. On the government’s proposal of increasing the annual threshold of taxable income to Rs900,000, the IMF is asking for the maximum income tax rate to be increased from 35% to 45%. However, the government is not willing to increase the maximum rate for the salaried individuals to 45% but showed flexibility to keep the taxable income threshold at the current Rs600,000.

It is also asking to keep the salaried and non-salaried slabs separate but is willing to increase the highest tax rate for non-salaried persons to 45%, said the sources.

The non-salaried business individuals pay tax after excluding expenses while the salaried persons pay tax on their gross income without excluding the expenses.

Prime Minister Shehbaz Sharif is so far not willing to increase the burden on the salaried class.

According to a proposal, if the taxable income threshold is increased to Rs900,000 per annum, the income tax rate can be up to 7.5% on a monthly income of Rs100,000. The current rate is 2.5% for this category. For the next slab, if the monthly income is up to Rs133,000, the under-discussion tax rate is 20%. The current rate is 12.5% that too for up to monthly income of Rs200,000. The IMF wants a higher rate at the lower income level. This slab will directly hit Pakistan’s middle-income group.

According to the third under-discussion slab, if the monthly income is Rs267,000, the tax rate could be 30%. The current rate on the monthly income of Rs300,000 is 22.5%. According to the fourth under-discussion slab, if the monthly income is up to Rs466,000, the income tax rate might be 40%. At present, on the monthly income of up to Rs500,000, the tax rate is 27.5%.

For the highest income tax rate of 45%, the under-discussion monthly income level is above Rs467,000, according to sources. At present, on over Rs500,000 income, a 35% tax rate is charged. The salaried class has so far paid Rs325 billion in income tax in 11 months, which is expected to rise to around Rs360 billion at the end of the current fiscal year.

If the revised income tax rates are accepted, the tax contribution of the salaried class will jump to Rs540 billion in the next fiscal year, said the sources. To absorb this increase in tax rates, even a 30% pay hike will not be sufficient.

Sources said that the IMF had asked Pakistan to share alternative proposals, in case it was not willing to increase the tax burden of the salaried class. Another round of discussions is expected soon.

Exporters’ tax rates

Sources said that an understanding had been reached between Pakistan and the IMF on changing the tax regime for the richest exporters.

As against the existing 1% final income tax on exporters, it has been proposed that from the next fiscal year, the 1% rate should be treated as minimum, according to government sources. As a result, the exporters will have to submit documents to justify their income and expenditures that are expected to boost collections from them.

Pakistan’s taxation system promotes inequality and puts a higher burden on people that have little capacity to bear. The IMF has asked Pakistan to end all special tax regimes, like the low income tax on gains made by investing in the stock market and bank deposits.

The global lender has recommended treating these gains as part of normal income. The IMF is pushing Pakistan to increase the burden on the salaried class until the country recovers higher taxes from the non-salaried business individuals.

During the first 11 months of the current fiscal year, the exporters paid a paltry sum of Rs85.5 billion in taxes, which was Rs241 billion, or 280%, less than the amount paid by the salaried class. During July-May FY24, the salaried class paid Rs326 billion in taxes, higher by 40%, or Rs93 billion, compared to the same period of last year.

The record Rs326 billion in tax payments by the salaried class is also 223% more than the combined tax paid by the rich exporters and influential retailers.

GST disagreement

Sources said that there was also no consensus on slapping the standard 18% sales tax on fertiliser, pesticides and seeds – the crucial inputs for the agriculture sector. The government was also not willing, so far, to impose 18% sales tax on medicines, solar panels and medical and surgical equipment. In case the 18% tax is imposed on medicines, there will be an additional collection of Rs130 billion in the next fiscal year. Similarly, taxing the medical and health-related supplies will generate another Rs100 billion.

Published in The Express Tribune, June 9th, 2024.

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