In the recently concluded fiscal year, Pakistan’s salaried class was compelled to pay a staggering Rs368 billion in income tax, marking a 232% increase compared to the taxes paid by exporters and retailers combined.
Despite the hefty contributions from salaried individuals in the fiscal year 2023-24, both the government and the International Monetary Fund (IMF) have deemed it insufficient. Consequently, the new budget, effective from July, has further increased income tax rates for salaried workers. Many of these individuals may be in for a shock when they receive their August salary slips.
According to the Federal Board of Revenue (FBR), salaried individuals paid Rs367.8 billion in taxes during the fiscal year 2023-24. This represents a 39% increase, or Rs104 billion more than the previous year.
The additional taxes paid by the salaried class nearly matched the Rs111 billion combined income tax paid by the wealthiest exporters and influential traders. Salaried individuals were the fourth-largest contributors to withholding taxes, following contractors, bank depositors, and importers.
For the fiscal year 2024-25, the government has further raised income tax rates for salaried individuals and introduced a 10% surcharge on the highest 35% income tax bracket. The FBR expects to collect an additional Rs85 billion from salaried workers this fiscal year, pushing their total contributions to over Rs450 billion by June next year.
Government officials claim that the IMF views salaried individuals as the most reliable source of guaranteed revenue for the FBR. A senior bureaucrat, speaking anonymously, stated that the IMF’s Mission Chief to Pakistan, Nathan Porter, has linked any potential reduction in income tax rates for salaried individuals to the government’s ability to generate revenue from other sources.
The IMF’s stance places an unfair burden on the salaried class, which lacks the political clout of exporters and retailers.
In the last fiscal year, the FBR collected Rs2.66 trillion in withholding taxes, accounting for 59% of the total income tax generated. This includes double rates collected from non-filers of returns, which has become an easy revenue source for the FBR.
In addition to direct income tax, the salaried class also faces other withholding taxes on electricity bills, telephone and internet connections, and international credit and debit card transactions.
The FBR’s data shows that the maximum amount of income tax was collected from contractors, saving account holders, importers, salaried individuals, electricity bills, telephone and mobile phone users, and dividend income.
Exporters and retailers paid Rs257 billion less in taxes than the salaried class. Last fiscal year, they contributed Rs111 billion in total income tax. Exporters, who earned $30.6 billion, paid a mere Rs93.5 billion in taxes, only a 27% increase from the previous year. Until June, exporters paid just 1% of their gross receipts in income tax, but the new budget has shifted them to the normal tax regime.
The FBR hopes to collect an additional Rs125 billion from exporters this fiscal year, but their total contributions will still be half of what is collected from salaried individuals.
Retailers paid Rs17.3 billion in advance tax last fiscal year, with distributors contributing Rs9.5 billion. The new income tax regime for retailers, implemented on Monday, exempts many traders, particularly small shops in residential and commercial areas, from the tax.
Tax collection from contractors and service providers increased by 27% to Rs498 billion last fiscal year, the highest contribution to withholding taxes. This figure also includes contributions from salaried individuals under certain contracts.
Higher interest rates led to a 52% increase in tax collection on profit from debt, totaling Rs488 billion. Importers paid Rs381 billion in income tax, making them the third-largest contributors to withholding taxes.
The FBR collected Rs130 billion in income taxes from electricity consumption, a significant increase that primarily affects non-filers with high monthly bills. However, income tax return filers in rented properties also pay this tax.
Another Rs100 billion was collected from telephone and mobile phone bills, impacting salaried individuals and others not legally required to pay income tax.
