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Budgets seem to be all about providing largesse to the poor and incentives to the industry while reiterating the constraint of being fiscally prudent. Any talk of addressing the issues confronting the middle class is skipped and never quite addressed.

The salaried class is the backbone of the economy, providing skilled labour, professional services, and human capital to various industries and sectors. They are also the most compliant taxpayers, as their income tax is deducted at source by their employers.

However, they are also the most vulnerable to economic shocks and uncertainties, as they have limited sources of income and savings. FBR data showed that during the first half of fiscal year 2023–24, salaried persons paid nearly Rs 158 billion in taxes.

The amount paid by the salaried class was Rs 43.4 billion, or 38% higher than the preceding year. In the last fiscal year, salaried persons had paid Rs264 billion in taxes, and the current trend suggests that their contribution crossed well over Rs300 billion in this fiscal year.

Salaried people remained the fourth-largest contributors to withholding taxes after contractors, bank depositors, and importers. In the budget, the government, for the second time in one year, increased taxes on salaried people earning more than Rs 200,000 a month.

On the other hand, the agricultural sector, which contributes 20% of the GDP, paid less than 1% of the total income tax. Similarly, the real estate sector, which has an unpaid potential of Rs 500 billion, and the wholesale and retail businesses, which have an unpaid potential of Rs 234 billion, are largely untaxed or under-taxed.

There is a basic principle: there will be no income tax in our society unless justice is established. There is a process of progress and improvement everywhere, but in the case of Pakistan, we are moving in reverse, from progress to deterioration.

In the last seven decades, we have been trying to bring in reforms that were never delivered in their true sense. Therefore, the economic foundation is still fragile despite introducing tax reforms. If I can only highlight our wholesale and retail sectors, this sector is characterized by high taxation and tax evasion.

According to a recent report by Planet Retail, the retail market in Pakistan has crossed $152 billion mark, which makes the sector the third largest contributor to the country’s GDP and its second largest employer. According to the Federal Board of Revenue (FBR), the retail market accounts for a whopping 18% of the GDP. Meanwhile, its contribution to the national exchequer is a meager 3.9%.

There has long been an understanding that the only way to bring these retailers within the tax net was to digitize transactions and keep an eye on buying and selling at these retailers. The latest idea was that under the FBR’s new POS system, details of each transaction would go directly to the board, and they would be able to calculate and charge tax accordingly.

Our salaried class is under serious financial stress, as their disposable income is shrinking and their living expenses are increasing. The inflation rate in Pakistan reached 29% in November 2023, which is much higher than the core inflation rate of 18.5%.

This situation is not only unfair but also unsustainable. The salaried class cannot bear the brunt of the fiscal adjustment alone, while other segments of society enjoy tax exemptions and concessions. Our fiscal deficit soared to 7.6 percent of GDP.

We have to see in Argentina that they have imposed a wealth tax for the next two years. We also have to think about how long we will depend on these unjustified taxes. There is no rocket science in this thing.

The salaried class cannot be expected to pay more taxes when they are already paying more than their fair share. The salaried class cannot be ignored or exploited when they are essential for the economic development and social stability of Pakistan. The basic question is whether we achieved the tax target. How did we achieve it?

If we achieved this by raising the tax target by taxing the salaried class unjustifiably or by taxing high-consumption commodities by raising the general sales tax, then, in my opinion, this is not a big success for us.

Conclusively, when the government taxes the rich, or those who are not paying tax or whose portion of tax payment is low according to their income or wealth, they don’t pay from their pockets; rather, they prefer to transfer this to the next level, and this process continues and ends at the general public, in which the majority belongs to the salaried class.

If the rupee weakens and foreign currencies strengthen against the rupee, or petrol prices increase by the government, all of these affect the highest-paying class because they can’t pass this increase or burden to the next level.

They are taking fixed monthly income, and that got taxed right away in the hands of employers. Just imagine that Rs. 264.3 billion is given as salary tax before salary is credited in any employee account or received. This is only one part of the tax that the salaried class pays; the rest of the taxes are beyond this figure, which are almost more than Rs. 2000 billion.

The salaried class already pays 200% more taxes than exporters and retailers, and the government is considering putting further burden of taxes on this class. If the government does so, it will be a total disaster for the salaried class, and a big question mark will be on the intention and will power of the government and its concerned departments as well.

In my opinion, the government needs to follow a one-line policy for further enhancement of tax revenue and tax spread on the basis of “taxing the untaxed or low-taxed incomes and documenting the undocumented economy.”

Copyright Business Recorder, 2024

Muhammad Sheroz Khan Lodhi

The writer is an economic analyst.

Email: [email protected]

Comments

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Aamir Jan 16, 2024 08:09am
Useless vague article. Taxes are not related to how much a sector is contributing to GDP but by the individuals or businesses income within that sector. Even if a sector like agriculture is very large collectively but made up of crores of small landholding farmers no one would be liable to pay taxes. Similarly in real estate stupid taxes like deemed incomes which are wealth taxes will result in flight if capital. Only principle that makes sense is to tax hidden incomes and check life styles. Also key is how are these taxes spent?
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asad Jan 16, 2024 10:16am
@Aamir , the gist of the article is that salaried class is disproportionately contributing higher tax to the treasury than other sectors. Other point made is that, salaried class doesnt have the luxury of passing on the additional impact to the end users like the business class or retailers. Hence they are squeezed to the tooth! Drastic tax reforms are needed to be made as of yesterday. Everyone has to contribute to the government treasury not just salaried class. No wonder you find so many in the real estate segment enjoying life with minimum tax paid. Business people, even having a meagre setup, are minting money tax free!
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Akif Janjua Jan 16, 2024 11:25am
Salaried class also got the most tax notices.. Benefits of paying taxes :)
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