The government had briefed the PPP leadership about the conditions by the IMF for the new bailout package, which include approval of the budget, increase in electricity and gas prices, signing of National Finance Pact (renegotiation of the NFC), and prior approval of the supplementary grants by the Parliament—Islamabad seeks $8 billion IMF loan under EFF, The Express Tribune, June 7, 2024
The International Monetary Fund (IMF) has asked Pakistan to tax the salaried and business individuals at a single income threshold by lowering the highest taxable income limit of the salaried people, which will result in charging a 35% income tax rate at a monthly income of Rs333,000—IMF aims to milk more taxes from salaried individuals, The Express Tribune, May 8, 2024
The majority of Pakistanis will certainly be dejected after hearing the maiden budget speech from banker-turned Federal Finance Minister for Finance & Revenue, Muhammad Aurangzeb, on June 12, 2024. Not because there will be no relief for them—nobody expects that anymore in Pakistan—but the real cause of disappointment will be the continuation of an unjust tax system that expropriates away a large sum of income from the lower and middle-class salaried persons.
The burden of regressive taxes has continuously increased on the less privileged classes, especially on white collared salaried individuals, and members of the lower and middle classes in Pakistan with a fixed income. On the contrary, the rich and mighty are paying meagre amounts. The members of the militro-judicial complex and parliamentarians are enjoying extraordinary tax-free perks and benefits—nobody speaks about this ruthless wastage of taxpayers’ money.
Out of a 120 million active and unique mobile users, total SIMs (subscriber identity module) issued till April 31, 2024 were 192 million, but many individuals have multiple SIMs, only 2,909,140 filed tax returns for tax year 2023 as per Active Taxpayers’ List (ATL) as on June 3, 2024. How many of these 120 million individuals have taxable income? The Federal Board of Revenue (FBR) has never bothered to find out.
Say 100 million have no income or income below taxable limit, yet they are paying 15% advance income tax. Out of twenty million having taxable income, not less than 3 million are ultra-rich—they are either not filing tax returns or showing much lower income than what they actually earn. This is evident from the fact that one million persons possess sprawling bungalows, two million expensive cars and about 600,000 go for holidays to foreign destinations every year.
FBR has failed to tax the ultra-rich according to their ability to pay. This is the real failure of the apex tax apparatus. Consequently, the main incidence of tax, through more than 50 withholding taxes, is shifted to those who have no income or income below taxable limit of Rs. 600,000. Amongst them, the salaried class is the worst affected. They pay full taxes on salary, then out of this taxed money, pay advance income tax on mobile use and exorbitant sales tax even on daily use items, including educational needs of their kids.
Salaried persons should be entitled to deduct the entire amount of educational expenses incurred by them on dependent children from their tax receipts, provided they furnish receipts of fee and other expenses.
Salaried people are compelled to spend sizeable amounts from their salary on the educational needs of their school going children, which is primarily the duty of the State under Article 25A of the Constitution, and yet tax credit for the whole amount is not available under section 60D of the Income Tax Ordinance, 2001 and restricted to taxable income of Rs. 1.5 million. This portrays the apathy of our government towards the salaried class that constitutes an overwhelming majority of the middle-class in the country. On the contrary, unprecedented tax breaks and benefits have been extended to the wealthier echelons of society.
Salaried persons should be entitled to deduct the entire amount of educational expenses incurred by them on dependent children from their tax receipts, provided they furnish receipts of fee and other expenses. The government must give liberal incentives for educational investments to industrial houses so that they can make their workers highly skilled and educated. Educational allowances should be tax free and not be considered as a perquisite. We can change the fate of our nation in a few years if education-related tax benefits are made a core of the government’s tax policy.
Health insurance is another important area that needs to be promoted through liberal tax incentives. At present, free provision to the employee of medical treatment or hospitalization or both by an employer or the reimbursement received by the employee of the medical charges or hospital charges or both paid by him, where such provision or reimbursement is in accordance with the terms of employment, is tax free, provided that National Tax Number of the hospital or clinic is given and the employer also certifies and attests the medical or hospital bills.
Alternately, any medical allowance received by an employee not exceeding ten per cent of the basic salary of the employee if free medical treatment or hospitalization or reimbursement of medical or hospitalization charges is not provided for in the terms of employment, is tax exempt. Medical expenses should not be treated as a perquisite as it is not something in the nature of fixed benefit or amenity periodically accruing from the employer to the employee. The employers should be encouraged through tax benefits, ideally double the amount expended, to extend medical facilities to their employees and dependents on them. This will help the government to reduce its healthcare burden.
It is worth mentioning that while middle-class salaried employees are facing the highhandedness of the Revenuecracy, the de facto legislators as far as tax laws are concerned as our worthy elected members while passing finance bills or tax law amendments bills act only as rubber-stamps, the privileged classes enjoy unprecedented tax-free perquisites and benefits.
Section 13(7) of the Income Tax Ordinance, 2001 taxes the notional benefit arising out of interest-free or concessionary loans given to employees which is in violation of Article 25 and 38(f) of the Constitution. This provision of law should be deleted as it is against the basic principles of the Constitution.
Salaried individuals should not be taxed unduly as they cannot claim any kind of expenditure against their emoluments, though they expend some part of it purely for employment purposes e.g. having good outfits etc. In their case minimum taxable threshold should be more than other persons who can claim a host of tax deductible amounts. They should not be taxed up to gross taxable salary of Rs. 1,200,000. Tax slabs in their case should be rationalised: Rs. 1,200,001 to Rs. 2,000,000, 5%, Rs. 2,000,001 to Rs. 3,000,000, 15%, from Rs. 3,000,001 to 5,000,000, 25%, from Rs. 5,000,001 to 7,000,000, 30%, and on 7,000,001 and above, 35%.
All professionals working on salary basis have to spend money to keep their knowledge up to date, yet no provision is available for claiming costs of buying manuals and books. This is hampering the growth of the commercial, financial, industrial and service sectors where specialization is the call of the hour. For example, in the IT industry, any highly paid software engineer, capable of bringing enormous foreign exchange for the country, would be discouraged from working in Pakistan merely for this unjust tax burden.
It is unfortunate that while the complete focus of FBR and many experts and analysts is on reduction in custom duties, corrective measures and business friendly budgets, salaried individuals are once again expecting no relief, and will rather face the brunt of new heavy indirect taxes and a rising cost of living. They have been facing tax brutality of the FBR since 2021, as highlighted earlier.
It is worth mentioning that while middle-class salaried employees are facing the highhandedness of the Revenuecracy, the de facto legislators as far as tax laws are concerned as our worthy elected members while passing finance bills or tax law amendments bills act only as rubber-stamps, the privileged classes enjoy unprecedented tax-free perquisites and benefits.
Exemptions under the Income Tax Ordinance, 2001, especially for the powerful segments of society, cause huge losses to the national exchequer—tax-free perks and benefits of public offices and high-ranking civil-military officials and public officeholders are funded by taxpayers’ money. The Finance Supplementary (Amendment) Act, 2018 withdrew the tax free perks of Governors and Ministers, but did not touch the same available to mighty generals, judges and civil bureaucrats. Billions forgone as tax exemptions and concessions could have significantly reduced Pakistan’s debt and perpetual fiscal deficit—the twin maladies it is suffering.
Since 1991, income taxation in Pakistan has largely converted into indirect taxation to benefit the rich—this was overseen by Nawaz Sharif and thereafter all regimes, including that of late General Pervez Musharraf retained it in the Income Tax Ordinance, 2001.
It is worthwhile to mention that all allowances including judicial allowance and special judicial allowance of the judges of the Supreme Court and High Courts are exempt under clause (56), Part I, Second Schedule to the Income Tax Ordinance, 2001.
The powerful civil-military bureaucracy and political elite received Rs. 1,800 billion in the fiscal year 2022-23 as perquisites and benefits. Not only this, these powerful segments did not pay a single penny as tax on benefits received free or at concessional rates, in utter violation of section 13(11) of the Income Tax Ordinance, 2001.
Section 13(11) of the Income Tax Ordinance, 2001says: “Where, in a tax year, property is transferred or services are provided by an employer to an employee, the amount chargeable to tax to the employee under the head “Salary” for that year shall include the fair market value of the property or services determined at the time the property is transferred or the services are provided, as reduced by any payment made by the employee for the property or services.”
Section 39(1)(j) of the Income Tax Ordinance, 2001 declares the following as income chargeable to tax: “The fair market value of any benefits, whether convertible to money or not, received in connection with the provision, use or exploitation of property”.
Prime Minter Shehbaz Sharif claims to be determined to uproot corruption. If this is the case, he must order FBR for recovery of lost revenue of amount due from all servants of State who received plots or lands or any other benefit and did not pay due tax under section 13(11) and section 39(1)(j) of the Income Tax Ordinance, 2001.
It is about time that Shehbaz Sharif orders a probe that how many officers of BS 20-22 have been taking benefit of clause (27) of Part II of the Second Schedule to Income Tax Ordinance, 2001 of reduced rate of 5% on ‘Compulsory Monetization of Transport Facility’ as well as using official transport? It should also be ascertained why this matter of abuse of law was not brought to the notice of the Parliament? Why did the officials of FBR not apprise IMF and the Finance Minister about withdrawing this clause that benefits officers in Grade 20 to 22?
Since 1991, income taxation in Pakistan has largely converted into indirect taxation to benefit the rich—this was overseen by Nawaz Sharif and thereafter all regimes, including that of late General Pervez Musharraf retained it in the Income Tax Ordinance, 2001. The presumptive tax and minimum, in reality, is indirect tax. For example, a contractor pays a fixed rate of income tax on gross value of contract—the burden falls on the contractee who withholds the income tax and deposits with FBR. On the same amount, sales tax is paid to the province where activity takes place. Thus, the contractee ends up paying 30-35% tax on gross value!
In any democracy, the State is bound to provide healthcare to all its citizens as its constitutional obligation, explicitly explained by Supreme Court of Pakistan in Shehla Zia v WAPDA (PLD 1994 SC 693). It is binding under Article 189 of the Constitution. Employers providing free healthcare to their employee or giving 10% fixed medical allowance of basic salary should be encouraged and be given more tax incentives.
There is an urgent need to rationalize our tax policies towards the salaried class—both professional and non-professionals. They contribute substantially towards economic growth and social development and their productivity should not be compromised by regressive and unjust tax measures.