Salaried class paid Rs391b in taxes

The struggling salaried class has paid a record Rs391 billion in income tax during nine months of this fiscal year, a highly discriminatory taxation where 10% of the total income tax collected from across Pakistan is now paid by salaried individuals.

Compared to Rs10 that the salaried class paid in taxes during July-March period out of every Rs100, the blue-eyed traders contributed merely 60 paisa.

Income tax payments during the nine-month period of this fiscal year were Rs391 billion, Rs23 billion more than the total income tax the salaried class paid during the 12-month period of the previous fiscal year, according to provisional collection estimates compiled by the Federal Board of Revenue (FBR).

During the July-March period, the FBR had collected Rs4.1 trillion in total income tax. The payments by salaried persons alone were nearly 10%, showing how the marginalised voiceless segment is overburdened by the government. Last year, this ratio was 7.5%.

The government of Prime Minister Shehbaz Sharif had targeted an additional Rs75 billion in income tax from the salaried class for the full fiscal year 2024-25. However, the figure has already surpassed Rs140 billion, with three months still remaining in the fiscal year. Income tax from the salaried class in the last nine-months has increased by 56% compared to the previous fiscal year.

Last year, the salaried class paid Rs368 billion in taxes. However, despite this backbreaking burden, where salaried individuals are taxed on their gross income without adjustments for expenditures, the government did not raise the issue of alleviating this burden during its recent talks with the International Monetary Fund (IMF).

"We are considering alternate options to reduce the burden of the salaried class without compromising progressivity in taxation," said Dr Najeeb Memon, the spokesman of the FBR.

The IMF team is arriving in Pakistan on May 14th to vet the next fiscal year's budget before it is presented in the National Assembly around June 4th, according to sources. The IMF team will stay till May 23rd.

The sources said that higher collection of taxes from salaried individuals could become a reason for not significantly lowering tax rates in the next fiscal year, due to its substantial revenue implications.

In contrast to Rs391 billion paid by the salaried persons, the retailers, mostly unregistered, contributed only Rs26 billion on account of withholding income tax on their purchases. The amount of tax that traders paid under section 236-H was 1,420% less than taxes paid by salaried persons.

Compared to every Rs10 that the salaried class contributed in taxes, the retailers paid mere 60 paisa.

Besides, wholesalers and distributors also paid Rs17.5 billion withholding tax in nine months and almost half of them were unregistered with the FBR, said the sources.

PM Sharif could not live up to his promise of collecting due taxes from the retailers. The IMF may ask Pakistan to show credible alternate fiscal means to offset the impact of any reduction in taxes on the salaried class.

In the budget, the government had imposed 2.5% withholding tax on traders, in the hope that this would force them to come into the tax system. Though the increase in the rate did help collect Rs13.3 billion more from the traders, but the intended objective could not be achieved. The traders passed on the cost of the additional tax to the end consumers.

Last June, the government significantly increased the tax burden on salaried individuals by reducing the number of tax slabs, disproportionately affecting the middle and upper-middle-income groups. The highest tax rate of 35% is now applied to those earning Rs 443,000 monthly, with an additional 10% surcharge, bringing the total tax rate to 38.5% for the highest slab.

The details showed that non-corporate sector employees paid Rs166 billion income tax this year, which is higher by Rs50 billion or 43%. Corporate sector employees paid Rs117 billion in income tax, also higher by Rs40 billion or 52%.

Employees of the provincial governments paid Rs69 billion in taxes, which was up by Rs34 billion or 103%. Federal government employees paid Rs39 billion, higher by Rs15.5 billion or 65%.

For the current fiscal year, the IMF had given Rs12.97 trillion tax target to the FBR, which has already sustained Rs714 billion in shortfalls in nine months.

The IMF has lowered the target to Rs12.3 trillion, but the FBR's internal estimates suggested that the collection may still remain in the range of Rs11.7 trillion. This is despite the fact that the government imposed Rs1.3 trillion in additional taxes in the budget.

The FBR is of the view that due to lower than estimated economic growth and inflation, its collection took a major hit.