IMF wants increase in tax on salaried class

The International Monetary Fund (IMF) has urged Pakistan to cut the number of tax slabs for the salaried and business class from the existing seven to four – a proposal, if accepted, will hurt the middle and upper middle-income groups.

The IMF took up the issue last week aimed at more than doubling tax collection from business individuals and salaried persons, government sources told The Express Tribune.

The proposal was floated by a technical mission of the IMF that completed its two-week review of Pakistan’s tax policies last week. The mission also recommended an increase in the existing reduced sales tax rates to the standard 18%, except for some essential goods, the sources added.

They said that the IMF had not yet given its recommendations in the shape of a report but the visiting mission did share its findings with the federal government before departing. The IMF is expected to soon share its draft report. Its recommendation is not binding so far. IMF Resident Representative Esther Perez did not respond to a query regarding the recommendation of the technical mission to reduce the number of personal income tax slabs.

There seems to be reluctance on the part of tax authorities to accept the IMF’s recommendation, as the salaried class is already buried under heavy taxation. The IMF has also said in the recent past to increase the tax contribution from agriculture and real estate sectors.

Sources said that the IMF recommended that the number of tax slabs should be reduced from seven to four. At present, the salaried class income tax rates range from the low of 2.5% to the high of 35%, depending on the annual income.

If the slabs are reduced from seven to four, the tax burden will increase for the people falling in the lower and middle slabs that will see a sharp increase in their tax rates.

There is no tax on the monthly income of up to Rs50,000. But on a monthly income of Rs100,000, there is a tax of 2.5%. On the monthly income of Rs200,000, the rate increases to 12.5%. For the income of Rs300,000, the tax rate is 22.5% and for Rs500,000, the rate jumps to 27.5%. For the highest slab of over Rs500,000 income, the rate is 35%.

In the last fiscal year, the FBR collected Rs264 billion in income tax from the salaried class.

FBR officials said that the maximum tax was collected from the people earning Rs200,000 to Rs300,000 a month. In case of deleting two to three tax slabs, the tax rates for the people earning from Rs200,000 to Rs300,000 would see a sharp increase, they added.

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When contacted, FBR spokesman Afaque Qureshi said that the IMF’s technical mission studied tax laws and tax rates but “we have yet to receive their technical report”. There are 74 types of tax exemptions related to personal income and allowances cost, which cost Rs232 billion in the last fiscal year, according to the FBR’s Tax Expenditure Report.

For the next fiscal year, the IMF has recently projected a Rs11 trillion tax target, of which it wants collection of over Rs4.8 trillion through the direct mode of taxation. The FBR’s report showed that all institutions, foundations, societies, boards, trusts and funds got income tax exemptions of Rs22 billion in 2022. Collective investment schemes and REIT schemes that are distributing more than 90% of their incomes to certificate holders shareholders also availed Rs21 billion in exemptions.

Interestingly, agencies of foreign governments and foreign nationals working in Pakistan also got Rs30.2 billion in tax exemptions last year. Employees of the IMF, World Bank and Asian Development Bank do not pay taxes on their income.

Two months ago, the World Bank had also recommended that the monthly salaried income of Rs50,000 should be taxed. But it later withdrew the proposal while acknowledging double-digit inflation in the country.

A significant tax base comprising unsalaried individuals and sole proprietors including retailers are out of the income tax net.

Sources said that the IMF also suggested that Pakistan should end the preferential sales tax rates being administered under the 8th Schedule of the Sales Tax Act. This will result in an increase in the sales tax rates on dozens of goods to the standard 18%.The IMF recommended that some of the sensitive goods, such as food products, may still be charged reduced rates, said the sources.

The FBR’s Expenditure Report showed that last year the country lost Rs130 billion due to the reduced sales tax rates.

Published in The Express Tribune, December 15^th, 2023.

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