Pakistan and IMF disagree over new income tax rates that will burden salaried class

Talks between Pakistan and the IMF have ended inconclusively due to a disagreement over new income tax rates for salaried and non-salaried persons and the imposition of a standard 18% sales tax on agriculture and health sector goods, according to a media report on Sunday.

On Friday, Pakistan and the International Monetary Fund (IMF) authorities discussed the outstanding issues related to taxation and the energy sector.

Citing sources, the Express Tribune newspaper reported that both sides could not resolve their differences on the income tax threshold, the merger of salaried and non-salaried rates and the maximum income tax rate for individuals.

Discussions are revolving around whether to charge a new backbreaking 45% income tax from salaried and non-salaried individuals on a monthly income of just over Pakistani Rs 4,67,000, sources said.

At present, the maximum rate of 35% applies to a monthly income of over Pakistani Rs 5,00,000.

However, both sides have converged on the issue of increasing the income tax burden on exporters in the next budget who paid a paltry sum of Pakistani Rs 86 billion this year, which is 280% less than the taxes paid by the salaried people.

Pakistan also showed a willingness to tax pensions beyond a certain income threshold.

In the latest talks, the international money lender insisted on merging the slabs related to salaried, non-salaried and other incomes.

On the government’s proposal of increasing the annual threshold of taxable income to Pakistani Rs 9,00,000, the IMF is asking for the maximum income tax rate to be increased from 35% to 45%.

However, the government is unwilling to increase the maximum rate for salaried individuals to 45% but showed flexibility to keep the taxable income threshold at the current Pakistani Rs 6,00,000.

It is also asking to keep the salaried and non-salaried slabs separate but is willing to increase the highest tax rate for non-salaried persons to 45%, said the sources.

The non-salaried business individuals pay tax after excluding expenses while the salaried persons pay tax on their gross income without excluding the expenses.

Prime Minister Shehbaz Sharif is until now unwilling to increase the burden on the salaried class.

According to a proposal, if the taxable income threshold is increased to Pakistani Rs 900,000 per annum, the income tax rate can be up to 7.5% on a monthly income of Pakistani Rs 100,000. The current rate is 2.5% for this category.

For the next slab, if the monthly income is up to Pakistani Rs 133,000, the under-discussion tax rate is 20%. The current rate is 12.5%, that too for up to a monthly income of Pakistani Rs 200,000.

The IMF wants a higher rate at the lower income level. This slab will directly hit Pakistan’s middle-income group.

At present, on an income of over Pakistani Rs 500,000, a 35% tax rate is charged. The salaried class has until now paid Pakistani Rs 325 billion in income tax in 11 months, which is expected to rise to around Pakistani Rs 360 billion at the end of the current fiscal year.

If the revised income tax rates are accepted, the tax contribution of the salaried class will jump to Pakistani Rs 540 billion in the next fiscal year, said the sources. To absorb this increase in the tax rates, even a 30% pay hike will not be sufficient.

Sources said that the IMF had asked Pakistan to share alternative proposals, in case it was unwilling to increase the tax burden on the salaried class. Another round of discussions is expected soon.

Sources said that an understanding had been reached between Pakistan and the IMF on changing the tax regime for the richest exporters.

As against the existing 1% final income tax on exporters, it has been proposed that from the next fiscal year, the 1% rate should be treated as a minimum, according to government sources.

Pakistan’s taxation system promotes inequality and puts a higher burden on people who have little capacity to bear it. The IMF has asked Pakistan to end all special tax regimes, like the low-income tax on gains made by investing in the stock market and bank deposits.

The global lender has recommended treating these gains as part of normal income. The IMF is pushing Pakistan to increase the burden on the salaried class until the country recovers higher taxes from the non-salaried business individuals.

During the first 11 months of the current fiscal year, the exporters paid a paltry sum of Pakistani Rs 85.5 billion in taxes, which was Pakistani Rs 241 billion, or 280%, less than the amount paid by the salaried class.

During July-May FY24, the salaried class paid Pakistani Rs 326 billion in taxes, higher by 40%, or Pakistani Rs 93 billion, compared to the same period last year.

The record Pakistani Rs 326 billion in tax payments by the salaried class is also 223% more than the combined tax paid by the rich exporters and influential retailers.

Sources said that there was also no consensus on slapping the standard 18% sales tax on fertiliser, pesticides and seeds – the crucial inputs for the agriculture sector.

The government was also unwilling to impose an 18% sales tax on medicines, solar panels and medical and surgical equipment. In case, the 18% tax is imposed on medicines, there will be an additional collection of Pakistani Rs 130 billion in the next fiscal year.

Similarly, taxing the medical and health-related supplies will generate another Pakistani Rs 100 billion, according to the paper.

Pakistan urgently needs a new loan from the IMF to keep the fear of default at bay. The government is eager to ink the agreement before the end of June when the fiscal year ends.