The taxation burden on Pakistan’s salaried group has significantly increased in recent years as the government focuses on what is commonly referred to as “soft targets.” While striving to boost the tax-to-GDP ratio, the government has been frequently criticized for its focus on taxing Pakistan’s formal sectors and insufficient efforts to target the informal sectors.
The government implemented a higher income tax rate of up to 35% in the 2024-25 budget, which affected the salaried class.
The budget documents state that the revised income tax brackets for salaried individuals took effect in 2024. If the annual salary exceeds Rs 600,000, these new brackets apply to wages paid on or after July 1, 2024.
There would be no alteration for salaried taxpayers with an annual income of up to Rs 600,000, as the income range will continue to be subject to a 0% tax rate.
However, numerous analysts contend that it would have a direct effect on the net income of the salaried class, which is burdened by inflation.
The salaried class believes that the government has yet to successfully impose taxes on wealthy individuals, who have been reaping the advantages of tax exemptions and reduced tax rates. Instead, the government has made it even harder for the salaried class to cover the expenses of daily life.
Salary Exemption Threshold And Burdened Salary Class
The salary exemption threshold has remained constant at Rs 50,000 per month for the past three years. Nevertheless, the government has proposed substantial modifications to taxable income exceeding that limit, which would directly affect persons who get a fixed salary. This step is expected to generate an additional Rs75bn.
According to the Finance Bill 2024, the monthly tax rate for salary class earners has been doubled from Rs 50,000 to Rs 100,000. The proposed hike will result in a doubling of the tax rate, from 2.5% to 5%, on all income received above Rs 50,000 in this group.
Meanwhile, employees with a monthly salary ranging from Rs 100,000 to Rs200,000 will now be subject to a 15% tax rate instead of the previous 12.2% on any amount beyond Rs100,000. Additionally, they will be required to pay a fixed amount of Rs 30,000 per year instead of the earlier Rs 15,000.
The monthly tax rate for those earning between Rs200,000 and Rs 366,000 has increased from 22.5% to 25%. In addition, the fixed amount has been raised from Rs 165,000 to Rs 180,000 every year.
Income between Rs 266,000 and Rs 342,000 would now be subject to a higher tax rate of 30%, as opposed to the previous rate of 27.5%. In addition, the flat tax has been increased to Rs 430,000 per year from Rs 300,000 per year.
Finally, the highest two slabs have been combined, resulting in an increased tax obligation for those who fall within the lower range of the new tax band. A 35% tax rate will be imposed on monthly incomes that exceed Rs 342,000. Previously, this tax rate was only applied to monthly salaries above Rs 1 million. To make the taxes more reasonable, the fixed amount payable per year for individuals in this tax category has been reduced by Rs 395,000.
Salaried individuals ranked as the fourth most significant donors to withholding taxes, following contractors, bank depositors, and importers. For the second time in a year, the government raised taxes on individuals whose monthly salary exceeded Rs 200,000 in the budget.
The IMF has advised Pakistan to reduce the number of tax brackets for the salaried and business class from seven to four. If this proposal is approved, it will negatively impact the middle and upper-middle-income categories. The recommendation was suggested by an IMF technical delegation that concluded its two-week assessment of Pakistan’s tax policies in December.
The tax burden on the salaried class has been augmented when inflation persists at one of its highest levels, and individuals’ purchasing power has notably diminished due to a substantial rise in costs for electricity, gas, heating, and food. This has made it hard for the salaried class to cover their daily expenses as most of their salaries are gone in taxes. They work the whole month to get their wages, and in the end, a big part of it goes into paying taxes. With the high inflation rate in Pakistan, it becomes difficult to cover the whole month’s expenses with the rest of the salary.