Should Pakistan increase its 35% income tax rate to 45%? Government and IMF disagree.
Should Pakistan increase its 35% income tax rate to 45%? Government and IMF disagree.
According to a media report on Sunday, negotiations between Pakistan and the IMF broke down without a deal on new income tax rates for paid and non-salaried individuals and the application of a standard 18% sales tax on commodities related to the agriculture and health sectors.
Authorities from Pakistan and the International Monetary Fund (IMF) spoke about the unresolved problems pertaining to taxes and the energy industry on Friday.
The Express Tribune newspaper, citing sources, stated that the parties were unable to come to an agreement about the maximum income tax rate for individuals, the income tax threshold, and the combination of salaried and non-salaried rates.
According to insiders, there is debate about whether to impose a new, crippling income tax of 45% on individuals who earn less than Pakistani rupees 4,67,000 a month, including both salaried and non-salaried workers.
The maximum rate of 35 percent now applies to any monthly income above Rs 5,00,000 in Pakistan.
But in the upcoming budget, all parties agree to raise the income tax burden on exporters, who only paid a pitiful Rs 86 billion in Pakistani rupees this year—280% less than the taxes paid by salaried citizens.
Pakistan additionally demonstrated a willingness to tax pensions above a particular income level.
The worldwide money lender insisted on combining the slabs for paid, non-salaried, and other revenues during the most recent negotiations.
In response to the government’s proposal to raise the annual taxable income threshold to Rs 9,00,000 for Pakistanis, the IMF is requesting a hike in the maximum income tax rate from 35 percent to 45 percent.
The government has shown flexibility in maintaining the taxable income level at the current Pakistani rupee 6,000,000, but it is unwilling to raise the maximum rate for salaried individuals to 45%.
According to the sources, it is also requesting that the salaried and non-salaried tax slabs remain distinct, but it is prepared to raise the top tax rate for non-salaried individuals to 45%.
While salaried individuals pay tax on their gross income without deducting expenses, non-salaried business owners pay tax after deducting expenses.
As of the now, Shehbaz Sharif, the prime minister, is unwilling to put more pressure on the salaried class.
A proposal states that the income tax rate can reach 7.5% on a monthly income of Pakistani Rs 100,000 if the taxable income threshold is raised to Rs 900,000 per year. For this category, the current rate is 2.5 percent.
For the following slab, the under-discussion tax rate is 20% if the monthly income is up to Pakistani Rs 133,000. The current rate is 12.5%, and that too only applies to Pakistani citizens earning up to Rs 200,000 per month.
When it comes to lower income levels, the IMF wants a higher rate. The Pakistani middle class will be immediately impacted by this slab.
At the moment, a 35 percent tax rate is applied to any income above 500,000 Pakistani rupees. The salaried class has so far paid 325 billion Pakistani rupees in income tax in 11 months; by the conclusion of the current fiscal year, this amount is anticipated to increase to over 360 billion rupees.
According to the sources, the tax contribution of the salaried class will increase to Pakistani Rs 540 billion in the upcoming fiscal year if the amended income tax rates are approved. Not even a 30% pay rise will be enough to cover this tax rate increase.
According to sources, the IMF requested that Pakistan submit backup plans in the event that it refused to raise the tax burden on the salaried class. It is anticipated that more talks will take place soon.
According to sources, Pakistan and the IMF have agreed to modify the tax structure for the wealthiest exporters.
According to government sources, a proposal has been made to classify the current one percent final income tax rate on exporters as a minimum starting in the next fiscal year.
Pakistan’s taxes structure encourages inequality and burdens those who are least able to pay it. Pakistan has been asked by the IMF to terminate all special tax regimes, including the low-income tax on gains from bank accounts and stock market investments.
It is advised by the international lender to treat these gains as regular income. Until the nation receives higher taxes from the non-salaried business folks, the IMF is pressuring Pakistan to raise the burden on the salaried class.
The exporters paid a pitiful Rs 85.5 billion in taxes in the first 11 months of the current fiscal year, which is Pakistani Rs 241 billion, or 28%, less than what the salaried class paid.
The salaried class paid Pakistani rupees 326 billion in taxes between July and May of FY24, which is 40% more than the same time the previous year, or Pakistani rupees 93 billion.
The salaried class in Pakistan paid a record Rs 326 billion in taxes, which is also 223 percent more than the combined tax payments made by wealthy exporters and powerful retailers.
According to sources, there was also disagreement over raising the ordinary sales tax from 18% to 28% on seeds, fertilizer, and pesticides—three essential inputs for the agricultural industry.
Additionally, the government refused to apply an 18% sales tax to prescription drugs, solar energy systems, and surgical and medical equipment. In the event that pharmaceuticals are subject to an 18% tax, an additional Rs 130 billion will be collected in Pakistani currency during the upcoming fiscal year.
In a similar vein, the study estimates that taxing medical and health-related items will bring in an additional Rs 100 billion for Pakistan.
Pakistan has to get a new loan from the IMF immediately to avoid defaulting. The administration is keen to sign the contract before the fiscal year closes in June.
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