The Federal Board of Revenue (FBR) has been advised by the International Monetary Fund (IMF) to eliminate the tax exemption on private employers’ pension contributions, reduce the number of slabs from seven to four, and double the tax burden on salaried and non-salaried classes.
According to IMF estimates, if the Personal Income Tax (PIT) recommendations were completely implemented, additional income of 0.5% of GDP, or Rs 500 billion year, might be generated.
The first eight months of the current fiscal year, from July to February, have seen the FBR receive Rs215 billion from the salaried class. The FBR is expected to be able to collect about Rs 300 billion from the salaried population. The PIT proposal from the IMF may result in an increase in income of Rs. 500 billion from both the paid and non-salaried groups.
Removing exemptions and other favorable tax treatment would allow the FBR to increase its revenue, top officials acknowledged to The News on Friday. As advised by the IMF, the PIT tax rates should be made simpler and the number of slabs should be lowered in a single progressive manner.
The IMF has suggested eliminating the salaried/non-salaried distinction and bringing the total number of tax bands down to a maximum of four in order to rationalize the tax rates for individuals.
There are seven tax slabs in effect right now. There is no tax rate in cases where the salaried class’s taxable income is less than Rs 400,000. A tax rate of five percent of the amount exceeding Rs400,000 is applied when the taxable income surpasses Rs400,000 but does not surpass Rs1,200,000. There is Rs40,000 + 10% of the amount above Rs1,200,000 in cases when the taxable income exceeds Rs1,200,000 but not Rs2,400,000. The tax rate in cases when the taxable income above Rs2,400,000 but falls short of Rs3,600,000 is Rs160,000 + 15% of the excess amount beyond Rs2,400,000. The tax rate in cases where the taxable income above Rs3,600,000 but falls short of Rs4,800,000 is Rs340,000 + 20% of the excess amount beyond Rs3,600,000. The tax rate in cases when the taxable income above Rs4,800,000 but falls short of Rs6,000,000 is Rs580,000 plus 25% of the excess amount over Rs4,800,000. The tax rate in the seventh and final bracket is Rs880,000 + 30% of the amount over Rs6,000,000, when the taxable income exceeds Rs6,000,000 in this case.
According to tax experts, reducing the number of slabs would have a negative impact on PIT’s progressivity because the FBR would have to raise taxes on income over Rs. 2 million, while the maximum rates in the current slab only apply to income over Rs. 6 million annually.
Lowering the income level for the higher rate slabs is what the IMF has suggested.
The IMF has requested that the FBR review Chapter III of the Income Tax Ordinance (ITO) and the Second Schedule in order to remove tax credits for share investments, mortgage payment deductions, preferential treatment for employees in particular industries, and tax deductions for full-time teachers and researchers. If lowering the zero rate threshold is not feasible, the FBR is also asked to maintain it at its current levels.
All of these actions might increase the national coffers by 0.5 percent of GDP.
Regarding pensions, the IMF has suggested that taxes be applied to either pension contributions or benefits. The IMF has requested that in order to meet the goals, either the benefits of the voluntary contributions to the workers’ participation fund be eliminated, or the pension exemption be eliminated and the pension payments be subject to one of the alternatives listed.
Former FBR Member Tax Policy Dr. Mohammad Iqbal stated that salary income was subject to gross taxation when he was approached. In Pakistan, there was no deduction permitted against salary income; in contrast, other countries allow for a variety of deductions, including those for personal costs like children’s schooling. Unlike salary income, all other kinds of income—such as income from property or businesses—are lessened by a variety of deductions and expenditures, and tax is not levied on gross receipts. In Pakistan, individuals who are not salaried are free to report their income and choose how much tax to pay on it, as the only recorded source of income is wage. He said that salary money, on the other hand, is completely recorded and cannot be understated.
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