Salaried class taxed record Rs368b

Pays 232% more than combined taxes paid by exporters, retailers

ISLAMABAD:

Pakistan’s voiceless salaried class was forced to cough up a record Rs368 billion in income tax in the just-ended fiscal year, which is now 232% more than the combined taxes paid by exporters and retailers.

The heavy tax contributions by salaried individuals in the fiscal year 2023-24 were still not enough for the government and the International Monetary Fund (IMF). The government-IMF duo has now further increased the salaried persons’ income tax rates in the new budget, effective from July. Many salaried individuals might be shocked to see their new salary slips in August.

Federal Board of Revenue (FBR) statistics showed that during fiscal year 2023-24, salaried people paid Rs367.8 billion in taxes. This amount was higher by 39% or Rs104 billion compared to the preceding year.

The additional income tax paid by salaried people in the last fiscal year was nearly equal to the combined Rs111 billion income tax paid by the richest exporters and highly influential traders. Salaried individuals remained the fourth-largest contributors to withholding taxes, after contractors, bank depositors, and importers.

For fiscal year 2024-25, the government has further increased income tax rates for salaried persons and imposed a 10% surcharge on the highest 35% income tax bracket. The FBR expects to generate roughly Rs85 billion additional from salaried people this fiscal year, increasing their total contributions to over Rs450 billion by June next year.

Government officials claimed that the IMF’s argument was that salaried people were the only reliable source from which the FBR could generate guaranteed revenues. A senior bureaucrat, speaking on condition of anonymity, said the IMF’s Mission Chief to Pakistan, Nathan Porter, linked any reduction in income tax rates for salaried individuals to the government’s ability to generate revenues from other sources.

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

During the last fiscal year, the FBR collected Rs2.66 trillion in withholding taxes, which accounted for 59% of the total income tax generated. However, details suggested that withholding tax collection, particularly at double rates from non-filers of returns, has become an easy source of revenue for the FBR.

In addition to direct income tax, the salaried class is also subject to other withholding taxes on electricity bills, telephone, internet connections, and using credit and debit cards for international transactions.

The maximum amount of income tax collected was from contractors, saving account holders, importers, salaried individuals, electricity bills, telephone & mobile phone users, and dividend income, as shown by details compiled by the FBR.

Exporters and retailers combined paid Rs257 billion less tax than the salaried class, according to the FBR’s figures. The total income tax paid by exporters and retailers was Rs111 billion in the last fiscal year. This was Rs257 billion or 232% less than the income tax paid by salaried persons.

Exporters, who earned $30.6 billion in the last fiscal year, paid a meagre Rs93.5 billion in taxes. Their contribution to income taxes was 27% or Rs20 billion higher than the preceding year. Until June this year, exporters were paying only 1% of their gross receipts in income tax. In the budget, the government ended the fixed income tax regime and put them in the normal tax regime.

There is hope that the FBR will generate an additional Rs125 billion in income taxes from exporters this fiscal year. But their total contributions would still be half the total income tax collected from salaried persons.

Similarly, at the rate of 0.5% advance tax on sales to retailers, the FBR collected Rs17.3 billion from retailers last fiscal year. The share of retailers and wholesalers in the total economy was around 19%. Distributors paid Rs9.5 billion in income tax last year.

On Monday, the government implemented a new income tax regime for retailers but again excluded the majority of traders from the ambit. Up to 100 square feet retail shops in residential areas and up to 50 square feet shops in commercial areas are exempted even from the new scheme, which offers as low as Rs100 per month in income tax.

Tax collection from contractors and service providers jumped by 27% to Rs498 billion in the last fiscal year – the highest contribution to withholding taxes. This also includes contributions by salaried individuals who provide services under certain contracts.

The collection on profit on debt jumped 52% to Rs488 billion in the last fiscal year, a direct impact of higher interest rates. Importers paid Rs381 billion in income tax on various types of imports – the third-largest contributor to withholding taxes.

On electricity consumption, the FBR collected Rs130 billion in income taxes – higher by nearly one-third. This tax is essentially meant for non-filers with a monthly bill of Rs25,000 or more. However, income tax return filers living in rented properties are also forced to pay this tax.

Another Rs100 billion was collected from telephone and mobile phone bills, affecting salaried people and those not even required under the law to pay any kind of income tax.