The salaried class: stop confiscatory taxation—I

Pakistan’s economy faces critical challenges, including fiscal issues, declining industrial productivity, and a narrow tax base that impede basic public services. Inflation is hurting purchasing power, high interest rates, rising energy cost are lowering investment, and rising cost of living is fueling public unrest.

The tax system, historically designed to create a fairer society and stimulate progress, now perpetuates inequality, frustrating the very people it is meant to serve. Taxation has become less a symbol of civic responsibility and more a reflection of an expropriatory system that demands greater but returns little for millions.

The tax architecture of Pakistan has long been criticized for its disparity between direct and indirect taxation and excessive rates. A significant portion of the revenue continues to come from indirect taxes, e.g., sales tax and withholding taxes that burden all citizens regardless of their income levels. However, among compliant taxpayers, it is the salaried class that bears undue burden.

According to data released by the Federal Board of Revenue (FBR) for fiscal year 2024-25, the salaried class contributed Rs 605.953 billion income tax at source, registering an increase of 54.7 percent, representing one of the most compliant segments of the economy. Taxed on almost gross amount in cash and heavy valuation of benefits in kind, their contribution is credited to state treasury every month, leaving little room for them to survive—condemned to pay 18 percent sales tax on after tax salary. On the other hand, large sections of the economy, especially retail, wholesale, and real estate, either continue to enjoy lower taxes or remain outside the tax net or manage to pass burden of taxes at sources on customers.

According to ‘Revenue Division Year Book 2025’, income tax collection at source from salaries for FY 2024-25 at Rs 606 billion was equal to what was collectively received at source from exporters (Rs 122 billion), advance tax on sale of retailers, distributor/wholesaler (Rs 37 billion and Rs 25 billion respectively), electricity bills (Rs 144 billion), income from property (Rs 49 billion) and sellers and buyers of immoveable property (Rs 118 billion each). This underlines how ujustly the government depends on employees.

According to the latest reports, total number of active taxpayers stands at around 5.6 million with the majority from the salaried class. The asymmetry becomes clearer when compared with the country’s total labour force of over 75 million. It shows that less than 10 percent of working Pakistanis file returns, and only a fraction pay substantial income tax. This highlights both enforcement weakness and structural bias against formal employment.

The issue goes beyond mere numbers, as taxation of salaried workers in Pakistan has reached what economists and tax experts often describe as ‘confiscatory’ levels. They can no longer afford living from after tax income. The marginal tax rate for the middle class, when combined with payroll deductions such as provident fund contributions and compulsory pension withholdings, now exceeds 35 percent.

Such a burden could only be justified in a state that provides essential public benefits, including but not limited to quality education for all, accessible healthcare, reliable infrastructure, and strong social safety nets. However, in Pakistan, these services are either missing or poorly financed. The result is a double jeopardy for the salaried workers paying high taxes but compelled to finance private schooling, expensive healthcare and security from already reduced earnings.

FBR’s latest Year Book shows that out of total tax collection of Rs 11.7 trillion, in FY 2024-25, income tax contributed Rs 5.76 trillion. Out of income tax, only Rs. 267 billion(4.6 percent of total income tax collection) was collection on demand (Rs 171 billion out of current demand and Rs 95 billion out of arrears). What a reprehensible performance by the entire field formation!

The salaried class, forming a small segment of the overall taxpayer base, carries a disproportionate share of tax burden, subjected to high income taxation and from net income buy goods and services at exorbitant sale tax rate of 18 percent federal on merchandise and 16% by provinces on services.

The government’s failure to widen tax net by grabbing the rich and mighty, and end exemptions of over Rs 5 trillion results in squeezing those already in the system, especially the salaried employees. This approach may offer short-term revenue stability, but it destroys public trust and undermines the broader goal of socioeconomic justice.

The structure of tax brackets further points out this inequity highlighting that for FY 2024-25, individuals earning between Rs 600,000 and Rs 1.2 million annually face an initial tax rate that may seem moderate on paper, but the real impact is far greater when inflation and cost-of-living adjustments are considered.

The bracket jumps abruptly for incomes above Rs 2 million, creating an effective rate that penalizes productivity and professional development. Absence of meaningful tax relief or inflation adjusted thresholds means that even small salary increases push workers into higher tax brackets without improving their real income, effectively turning the hidden rise in taxes into a penalty on their achievements.

(To be continued on Monday)

Copyright Business Recorder, 2025