PM orders review of high tax rates

ISLAMABAD:

Prime Minister Shehbaz Sharif has instructed a review of the possibility of reducing higher rates of income and sales tax to stop capital and human flight, as despite putting the maximum burden, the government suffered a Rs276 billion revenue shortfall in the first four months.

In what appears to be a highly ambitious plan, which is still in its infancy and will undergo multiple rounds of scrutiny, the government can inject Rs1.1 trillion into the economy and households by slashing the unaffordable rates of corporate, individual and salaried class income tax and sales tax.

Government sources said that the Federal Board of Revenue (FBR) was preparing different models to bring taxes down to regional levels, so companies stay back in Pakistan and individuals too are not overtaxed.

The FBR's initial working suggested a reduction in corporate income tax from 29% to 25%, the maximum individual rate from 45% to 25%, abolishing 10% super tax, ending 15% inter-corporate dividend tax and cutting sales tax from 18% to 15%.

Sources said that the estimated annual revenue impact of the move could be Rs1.1 trillion, with the maximum impact of over Rs600 billion on account of reducing the standard sales tax rate.

However, it is highly unlikely that the International Monetary Fund (IMF) may endorse such a plan, which will leave the government with the option of rolling out the plan after the end of the bailout package, according to the sources.

The IMF too appears concerned about the multinational companies leaving Pakistan, which is contrary to the IMF's goal of attracting foreign investment by ensuring an internationally competitive environment. Individuals are also looking for overseas jobs.

Sources said that taxes have reached such a suffocating level that on the one hand the companies end up paying about 60% of net income in taxes and on the other hand they are forced to pay advance income tax to the FBR to help it achieve targets.

The situation was the worst in the case of salaried class. According to the FBR, the "withholding tax collection from salaries registered the highest increase of Rs214.2 billion (55% growth) in the last fiscal year, primarily due to a decrease in the number of income tax slabs and an increase in the corresponding tax rates in each slab".

As a result, the salaried class paid a record Rs605.6 billion in the last fiscal year, the second highest after contract payments. Ironically, in contract payments, there are also salaried class-related payments.

Revenue performance

The FBR's statistics showed that against the target of Rs4.1 trillion, the four-month (Jul-Oct) collection reached Rs3.833 trillion, widening the shortfall to Rs276 billion. It came despite the imposition of new taxes in the budget, the increase in tax rates and some enforcement measures. The Jul-Oct collection was only Rs396 billion, or 11.5%, more than the last fiscal year.

Tax authorities said that revenues suffered badly because of a slowing economy and the situation was further complicated by curtailing the local gas production for the sake of consuming surplus imported LNG. They said that the carbon levy on furnace oil also impacted its use, which in turn affected the sales tax collection.

After the FBR sustained a Rs197 billion shortfall in the first quarter, the IMF during the recent review talks agreed to cut the annual target of Rs14.13 trillion by the same amount. However, the FBR has not adjusted the monthly targets.

The government has assured the IMF that it was ready to take contingency measures to the tune of Rs200 billion annually in January, if the first-half collection remained below the target or expenditures exceeded the agreed limit.

The FBR collected Rs1.8 trillion worth of income tax in four months, missing the target by Rs103 billion. However, the collection was 11.5%, or Rs185 billion, higher than last year.

Sales tax collection amounted to Rs1.36 trillion, falling behind the target by Rs182 billion. It was still Rs123 billion higher than last year.

Federal excise duty collection stood at Rs259 billion, slightly lower than the four-month target. Customs duty collection reached Rs419 billion, which was Rs12 billion more than the target due to increased imports.

Tax authorities said that due to the duty reduction in budget, many items slipped to a zero levy, which led to a 42% increase in their imports. Pakistan is also facing the dumping of foreign goods, which is harming local manufacturing.

PM Sharif on October 25 established a working group on customs, trade, tariffs and dumping, which will be headed by a leading businessman. The working group has held its first meeting this week and will present its findings to the government.

The FBR missed the monthly tax collection target by Rs71 billion as it got Rs950 billion in October. The growth in monthly collection was only 8%, which was near the nominal GDP growth.

Tax returns

The FBR on Friday did not further extend the date for filing annual tax returns after the PM stopped it from giving blanket extension in the filing deadline. However, the taxpayers facing genuine hardships may approach their respective field formations through the FBR's IRIS system for an extension in filing returns.

The FBR recorded a significant increase in income tax return filings for tax year 2025, marking a new milestone in voluntary compliance and taxpayer awareness, it claimed.

As of October 31, 2025, a total of 5.9 million tax returns had been filed, compared to five million returns in the same period of last year, showing an increase of 17.6%.

However, compared to tax year 2024, the number of income tax return filers decreased by 24.3% or 1.9 million. In the last tax year, 7.8 million individuals and companies had filed returns. The filing will continue in the coming months as the inactive taxpayer status attracts penalties.

The taxpayers paid Rs130 billion along with the returns, which were almost at the last year's level.