Pakistan’s salaried class has emerged as a cornerstone of the country’s revenue collection, contributing a staggering Rs285 billion in income tax during the first seven months of the current fiscal year. This marks a significant increase of Rs100 billion compared to the same period last year, highlighting the growing tax burden on salaried individuals.
While the salaried class continues to shoulder a disproportionate share of the tax burden, the government has struggled to bring other sectors, such as wholesalers and traders, into the tax net. This article explores the latest data, the challenges faced by salaried individuals, and the government’s potential plans to address these issues.
Breaking Down the Numbers: Who’s Paying What?
The latest data reveals a detailed breakdown of income tax contributions from various sectors of the salaried class:
- Non-Corporate Sector Employees: Paid Rs122 billion, a 41% increase (Rs36 billion) from the previous year.
- Corporate Sector Employees: Contributed Rs86 billion, marking a 50% rise in tax payments.
- Provincial Government Employees: Paid Rs48 billion, almost double the amount from the previous year.
- Federal Government Employees: Contributed Rs29 billion, reflecting a 63% increase.
These figures underscore the significant role played by salaried individuals in Pakistan’s revenue collection. However, the disproportionate burden on this segment has raised concerns about fairness and sustainability.
The Struggle to Broaden the Tax Net
Despite the heavy taxation on salaried individuals, the government has faced challenges in bringing other sectors, particularly wholesalers and traders, into the tax net. This imbalance has led to calls for a more equitable tax system that distributes the burden more evenly across all economic segments.
At a recent seminar on business reforms, Minister of State for Finance Ali Pervaiz Malik acknowledged the issue, stating that the government is considering reducing the tax burden on salaried individuals in the next federal budget. He emphasized that the current tax liability on salaried individuals has exceeded their capacity to pay, forcing them to bear an unfair share of the country’s revenue collection.
The IMF’s Role in Increasing Tax Burdens
Malik revealed that the government imposed an additional Rs75 billion tax burden on salaried individuals in the last budget under pressure from the International Monetary Fund (IMF). Despite initial reluctance from Prime Minister Shehbaz Sharif, the move was deemed necessary to meet IMF conditions.
Interestingly, the revenue collected from the salaried class has already surpassed the Rs75 billion target, with five months still remaining in the fiscal year. This highlights the efficiency of tax collection from salaried individuals but also raises questions about the sustainability of such high taxation.
Challenges in Taxing the Trader Community
One of the key challenges in Pakistan’s tax system is the difficulty in enforcing direct taxation on the trader community. Malik noted that at-source tax deductions from non-registered traders are being used as a benchmark for compliance, rather than implementing a more comprehensive tax regime.
This approach has limited the government’s ability to collect revenue from a sector that contributes significantly to the economy but remains largely outside the formal tax net.
Deferred Legislation: Impact on the Real Estate Sector
In a related development, the National Assembly recently deferred the approval of a bill aimed at restricting economic transactions by ineligible individuals. This move could have significant implications for the real estate sector, which has long been criticized for facilitating tax evasion and money laundering.
The deferral highlights the challenges of implementing reforms in sectors that have historically operated outside the formal economy.
What’s Next for Pakistan’s Tax Policy?
As the government prepares for the next federal budget, there is growing speculation about potential reforms to reduce the tax burden on salaried individuals. Key areas of focus could include:
- Reducing Income Tax Rates: Lowering tax rates for middle- and lower-income salaried individuals to provide relief.
- Broadening the Tax Net: Implementing measures to bring wholesalers, traders, and other under-taxed sectors into the formal tax system.
- Simplifying Tax Compliance: Introducing reforms to make it easier for individuals and businesses to comply with tax regulations.
- Targeted Subsidies: Providing targeted subsidies or relief measures to offset the impact of high taxation on low- and middle-income groups.
Pakistan’s salaried class has demonstrated remarkable resilience in contributing to the country’s revenue collection, even as they bear an increasingly heavy tax burden. However, the current system is unsustainable and risks alienating a critical segment of the population.
As the government considers reforms, it must prioritize fairness and equity, ensuring that all sectors of the economy contribute their fair share. By broadening the tax net and reducing the burden on salaried individuals, Pakistan can build a more inclusive and sustainable tax system that supports long-term economic growth.
