Benjamin Franklin’s famous quote, “In this world, nothing can be said to be certain except death and taxes,” resonates profoundly with the registered taxpayers of Pakistan, particularly the salaried class.

The salaried class in Pakistan, particularly those with annual incomes between 600,000 and 1.2 million rupees, is increasingly dissatisfied with the new tax policies introduced in the budget for the fiscal year 2024–25. Given the higher taxes they now have to pay, this group has been vocal about the need to adjust the exemption threshold.

While the government’s decision to raise the minimum wage from 32,000 to 37,000 rupees per month is commendable in light of inflation and rising living costs, it raises questions about equity. Individuals earning just 13,001 rupees above the new minimum wage are now required to pay a 5% tax on any income exceeding 50,000 rupees per month, which has highlighted the financial burden on the lower-middle class.

The Pakistani President recently emphasized the importance of a balanced approach to taxation that does not unduly burden the salaried class while ensuring adequate revenue generation for the state. His remarks align with a broader public sentiment, advocating for a reconsideration of existing tax laws to promote fairness and prevent undue impact on those approaching substantial tax obligations.

According to official figures, payroll taxes in Pakistan are high because the salaried class contributes a disproportionate share of the country’s income. This cohort, already strained by inflation and stagnant earnings, now faces increased taxes, compounding their challenges. Many Pakistanis struggle to meet basic living expenses, making the new tax laws particularly harsh for those already finding it difficult to pay their bills.

One of the more contentious aspects of the new tax policies is the inclusion of income tax in electricity bills. Consumers have widely criticized this practice for being unwarranted and unduly burdensome. The Federal Board of Revenue (FBR) should solely bear the responsibility of overseeing and ensuring the proper functioning of energy production and distribution companies involved in tax collection.

Adding income tax to power bills has escalated monthly expenses for many, exacerbating already precarious financial situations amid other rising costs. With current Pakistani electricity prices, these additional charges hit consumers especially hard, reducing their disposable income and making it harder to afford other necessities.

One cannot overlook the influence of the International Monetary Fund (IMF) on recent tax changes and related budgetary measures. Pakistan’s relations with the IMF have heavily influenced its taxation strategy as it strives to meet the stringent requirements of its IMF loans.

To stabilize the economy and reduce budget deficits, the government often enacts more taxes and stricter tax policies to broaden the tax base. While these measures aim to stabilise the economy, they frequently impose a significant societal cost, particularly affecting the most vulnerable segments of society.

There are both advantages and disadvantages to the IMF’s role in Pakistan’s economic policymaking. On one hand, the IMF’s financial support is crucial for maintaining macroeconomic stability and enabling the government to perform essential functions. On the other hand, austerity measures driven by IMF conditions often disproportionately impact low- and middle-income groups.

This broader trend of IMF-influenced economic policy includes recent tax revisions, such as the controversial inclusion of income tax in power bills and higher tax rates for the salaried class. Some argue that a progressive approach is necessary to ensure that individuals across different income levels contribute their fair share of taxes. They propose that the government should target the untaxed informal sector and wealthy individuals who frequently evade taxes in order to expand the tax base, thereby alleviating the burden on the salaried class.

In light of President Asif Ali Zardari’s recent statements and actions, it is critical to address these issues promptly. An efficient and equitable tax system is essential as the government navigates economic changes and its global financial commitments.

This necessitates ensuring that tax collectors do not misuse power bills as a revenue-collection tool, as well as reviewing the income tax structure and exemption levels. To prevent external interference, the FBR’s role must be well-defined and strictly adhered to.

The tax changes proposed in Pakistan’s budget for 2024–25 have sparked significant debate and concern. Factors such as increased taxes on the salaried class, the incorporation of income tax into electricity bills, and the impact of IMF conditions have created a complex and challenging economic environment. As the government seeks to balance tax collection with social equity, it must carefully consider the average Pakistani’s plight.

There’s need to address wasteful and unjustified government spending. To create a more equitable and sustainable fiscal policy, it is necessary to revise exemption levels, expand the tax base, and ensure transparent and fair revenue collection processes.

In South Asia, countries like India, Bangladesh, and Sri Lanka have implemented various approaches to taxing the salaried class, often coupling tax obligations with specific benefits to alleviate the financial burden. In India, the income tax structure is progressive, with multiple tax slabs designed to ensure that higher earners pay a larger proportion of their income in taxes.

To offset the impact, the Indian government provides numerous deductions and exemptions, such as those for housing loans, education expenses, and health insurance premiums, which significantly reduce the taxable income for salaried individuals. Similarly, Bangladesh has a tiered tax system where tax rates increase with higher income brackets. The government offers benefits such as tax rebates on government bond investments and life insurance premiums.

Sri Lanka, while having a simpler tax structure, offers relief through personal allowances and exemptions for certain types of income, such as pension contributions and savings account interest. These measures not only help to ease the tax burden on the salaried class but also encourage savings and investments, contributing to overall economic stability. By providing targeted benefits and maintaining a progressive tax system, these regional countries strive to balance revenue generation with the economic well-being of their salaried citizens.

The increase in income tax is a particularly contentious issue, with significant implications for socio-economic stability in Pakistan. Higher taxes on the salaried class not only strain household finances but also contribute to a broader sense of economic insecurity. This financial pressure can lead to socio-economic instability, as individuals and families find it increasingly difficult to meet their basic needs and maintain their standard of living.

The risk of brain drain is one of the most concerning potential outcomes of higher income taxes. As financial pressures mount, skilled professionals may seek better opportunities abroad, where they can achieve a higher quality of life and retain more of their earnings. This exodus of talent can have long-term negative effects on Pakistan’s economic growth and development, as the country loses valuable human capital that is essential for innovation and productivity.

To mitigate these risks, it is crucial for the government to adopt a more progressive tax policy that reduces the burden on the salaried class and ensures a fairer distribution of tax obligations. By targeting wealthy individuals and the informal sector, the government can expand the tax base without disproportionately impacting those who are already struggling. Addressing these issues is vital to maintaining socio-economic stability and preventing the loss of skilled professionals who are critical to Pakistan’s future.

Copyright Business Recorder, 2024

Abdullah Khalid

The writer is a researcher associated with Sustainable Development Policy Institute

Dr Maaz Maqsood Hashmi

The writer is an independent policy analyst

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