Pakistan’s salaried class faced a record income tax burden of Rs368 billion in the recent fiscal year, a staggering 232% more than the combined taxes paid by exporters and retailers.
Despite the substantial tax contributions from salaried individuals in the 2023-24 fiscal year, both the government and the International Monetary Fund (IMF) demanded even more. The new budget, effective from July, has further increased the income tax rates for salaried persons, meaning many will see higher deductions on their August salary slips.
According to Federal Board of Revenue (FBR) data, salaried individuals paid Rs367.8 billion in taxes during the 2023-24 fiscal year, a 39% or Rs104 billion increase from the previous year.
This additional income tax was nearly equal to the combined Rs111 billion 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 2024-25 fiscal year, the government has not only increased income tax rates for salaried persons but also imposed a 10% surcharge on the highest 35% income tax bracket. The FBR expects to generate approximately Rs85 billion more from salaried people this year, raising their total contribution to over Rs450 billion by June next year.
Government officials claim the IMF views salaried individuals as a reliable source of revenue for the FBR. A senior bureaucrat, speaking anonymously, mentioned that 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 revenue from other sources.
Critics argue that the IMF is unfairly burdening the salaried class, which lacks the political influence of exporters and retailers.
Last year, the FBR collected Rs2.66 trillion in withholding taxes, accounting for 59% of total income tax revenue. However, the data suggests that withholding tax collection, especially at double rates from non-filers, has become an easy revenue source for the FBR.
In addition to direct income tax, the salaried class also pays other withholding taxes on electricity bills, telephone and internet connections, and international transactions made with credit and debit cards.
The highest income tax collection came from contractors, saving account holders, importers, salaried individuals, electricity bills, telephone and mobile phone users, and dividend income, according to FBR data.
Exporters and retailers paid Rs257 billion less in taxes than the salaried class. The total income tax paid by exporters and retailers was Rs111 billion last year, Rs257 billion or 232% less than what salaried persons paid.
Exporters, who earned $30.6 billion last year, contributed only Rs93.5 billion in taxes, a 27% or Rs20 billion increase from the previous year. Until June, exporters paid only 1% of their gross receipts in income tax. The new budget has ended the fixed income tax regime, placing them under the normal tax regime.
The FBR hopes to generate an additional Rs125 billion in income taxes from exporters this year, but their total contributions would still be half of what is collected from salaried persons.
The FBR collected Rs17.3 billion from retailers last year at a rate of 0.5% advance tax on sales. Retailers and wholesalers make up about 19% of the economy. Distributors paid Rs9.5 billion in income tax last year.
On Monday, the government implemented a new income tax regime for retailers but excluded most traders. Retail shops up to 100 square feet in residential areas and up to 50 square feet in commercial areas are exempt from the new scheme, which charges as little as Rs100 per month in income tax.
Tax collection from contractors and service providers increased by 27% to Rs498 billion last year, the highest contribution to withholding taxes. This includes contributions from salaried individuals providing services under certain contracts.
The collection on profit from debt jumped 52% to Rs488 billion last year due to higher interest rates. Importers paid Rs381 billion in income tax, making them the third-largest contributors to withholding taxes.
On electricity consumption, the FBR collected Rs130 billion in income taxes, a nearly one-third increase. This tax targets non-filers with monthly bills of Rs25,000 or more, but income tax return filers living in rented properties also pay this tax.
Another Rs100 billion was collected from telephone and mobile phone bills, affecting both salaried people and those not legally required to pay any income tax.