Pakistan’s salaried class was compelled to pay a record Rs368 billion in income tax in the fiscal year 2023-24, a 232% increase over the combined taxes paid by exporters and retailers. Despite these heavy contributions, the government, under pressure from the International Monetary Fund (IMF), has further increased income tax rates for salaried individuals in the new budget effective from July.
Statistics from the Federal Board of Revenue (FBR) revealed that salaried individuals paid Rs367.8 billion in taxes during the 2023-24 fiscal year, a 39% 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, making salaried individuals the fourth-largest contributors to withholding taxes after contractors, bank depositors, and importers.
For the fiscal year 2024-25, the government has increased income tax rates for salaried persons and imposed a 10% surcharge on the highest 35% income tax bracket. The FBR expects to generate approximately Rs85 billion more from salaried individuals this fiscal year, pushing their total contributions to over Rs450 billion by June next year.
Government officials claim the IMF insists on taxing salaried individuals heavily as they are considered the most reliable revenue source. A senior bureaucrat, requesting anonymity, stated that IMF 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.
The IMF’s stance has placed an undue burden on the salaried class, which lacks representation in power corridors, unlike exporters and retailers. The FBR collected Rs2.66 trillion in withholding taxes last fiscal year, constituting 59% of the total income tax generated. 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 faces other withholding taxes on electricity bills, telephone and internet connections, and international transactions using credit and debit cards. The maximum income tax was collected from contractors, saving account holders, importers, salaried individuals, and users of electricity, telephone, and mobile services.
Exporters and retailers paid Rs257 billion less in taxes than salaried individuals, with the former paying Rs111 billion in total income tax last fiscal year. Exporters, earning $30.6 billion, paid Rs93.5 billion in taxes, a 27% increase from the previous year. Until June, exporters paid only 1% of their gross receipts in income tax, but the new budget ends this fixed regime.
The FBR hopes to generate an additional Rs125 billion in income taxes from exporters this fiscal year, although their total contributions will still be half of what salaried individuals pay. Retailers paid Rs17.3 billion in advance tax on sales last fiscal year, with distributors contributing Rs9.5 billion in income tax.
The government has implemented a new income tax regime for retailers, excluding most traders from its ambit. 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 offers as low as Rs100 per month in income tax.
Tax collection from contractors and service providers surged by 27% to Rs498 billion last fiscal year, the highest contribution to withholding taxes. This includes contributions from salaried individuals providing services under certain contracts. Collections on profit on debt rose 52% to Rs488 billion, driven by higher interest rates. Importers paid Rs381 billion in income tax on various imports, the third-largest contributor to withholding taxes.
The FBR collected Rs130 billion in income taxes from electricity consumption, primarily targeting non-filers with monthly bills of Rs25,000 or more. However, income tax return filers in rented properties also pay this tax. Another Rs100 billion was collected from telephone and mobile phone bills, affecting salaried individuals and those not legally required to pay any income tax.
