The government is planning to eliminate tax concessions that disproportionately favor high-income individuals over the middle-class workforce.
The International Monetary Fund (IMF) has recommended that the government treat salaried employees’ incomes the same as those of non-salaried individuals for personal income tax purposes. However, the Federal Board of Revenue (FBR) argues that these income types are not equivalent. If salary and non-salary incomes are classified as personal income under IMF guidelines, the tax burden on the salaried class would increase significantly.
The government has outlined revenue measures totaling Rs500 billion for the 2024-25 budget, pending final revenue target projections from the IMF. Unlike the usual practice of formulating tax recommendations at the FBR headquarters, the Ministry of Finance is handling all computations.
FBR Plans to Raise Additional Rs500bn in 2024-25
FBR forecasts indicate that autonomous revenue collection (based on GDP growth and inflation) will surpass Rs11.50 trillion in FY25. The federal government will consult with the IMF before finalizing revenue measures. In the previous budget, revenue measures amounted to Rs415bnThe FBR has proposed raising the tax exemption limit for the salaried class to Rs1.2 million for the 2024-25 fiscal year. However, due to rising inflation, this may be adjusted downward to Rs900,000 from the current Rs600,000.
Discussions with the IMF also include the pension tax, aiming to align the salary slab with pensioner incomes. However, the FBR’s focus is on federal government employees’ pensions, estimated at around Rs700bn. The FBR opposes introducing a salary slab for pensioner income, suggesting an alternative mechanism for taxing wealthier pensioners.
Private sector pensions, provided by large companies, remain under review. “No final decision has been made,” a tax official informed, adding that the finance ministry is negotiating pension-related tax changes with the IMF. The FBR has yet to calculate the revenue impact of taxing pensions.
Eliminating exemptions will also require prior consultation with the IMF. The FBR has submitted data on potential revenue gains from withdrawing these exemptions. The IMF has urged the FBR to collect taxes from traders and wholesalers currently outside the tax net.
No agreement has been reached on increasing regulatory tariffs on imports, as the IMF typically focuses on sales tax and income taxes, particularly withholding taxes. Current sales tax exemptions exceed Rs1.2 trillion, posing a challenge for the government to revoke exemptions on food, international agreements, and pharmaceuticals. Some items, like insecticides and solar panels, may face sales tax imposition
Simultaneously, the government plans to increase existing withholding tax rates and introduce new ones, such as reviving the tax on cash withdrawals from banks, to maximize revenue. Additionally, the finance ministry is considering taxing exempted raw material imports while increasing rates on existing ones. Previously, the PTI government removed the raw material tax to boost exports and stimulate industrial growth.
