Targeting middle-income employees

Regressive measures will adversely impact businesses across all sectors and discourage capital formation and investment in businesses

Targeting  middle-income employees


n June 25, the government of Pakistan got approval for its second budget from the National Assembly, for which the term expires on August 13. The Finance Bill 2023, tabled along with the annual budget on June 9, has evoked mixed reactions. The amended version, purportedly prepared in line with the International Monetary Fund (IMF) advice, lacks a viable or prudent plan/ vision to pave the way for the much-needed fiscal consolidation, a considerable shift and significant progress towards better economic management.

It has essentially increased the tax burden on the vulnerable formal sector middle-income salaried class, already hit hard by historic high inflation and raised taxes for those already in the tax net.

Like its predecessors, the PDM government has failed to broaden the tax base by adding new sectors in the tax net by withdrawing tax exemptions and improving enforcement to catch the non-filers. Instead, it has relied on the old approach to extort the maximum from the existing taxpayers.

In view of the huge fiscal deficit in the current budget, it was expected that the government would focus on broadening the tax base and eliminating tax exemptions to generate more revenue. However, the fourth-time finance minister has preferred the traditional approach to meet the fiscal gap.

The timing of the budget was crucial with the Extended Fund Facility programme of the IMF expiring and general elections approaching. Standing on the verge of economic fallout, the government hardly had another option. However, the usual callousness towards economic management caused a significant delay in efforts for its revival.

The government and the finance minister have wasted precious time. They have been unable to convince the lender of last resort about compliance with its conditions. Dar’s apparent stubbornness seems to indicate a failure to appreciate the negative impact on the economy. The delay in addressing the IMF concerns has left Pakistan lagging behind three periodical reviews at the technical level.

Some experts have raised doubts about estimates of non-tax revenues and provincial surplus, etc. While the federal government estimated Rs 650 billion in the form of provincial surplus, the provincial governments have all presented deficit budgets on account of a shortfall in amounts due under the 7th National Finance Commission Award after the failure of the Federal Board of Revenue (FBR) to meet the tax target for FY 2023-24.

The IMF was never going to be satisfied with such a casual approach. Thus, in the final version of Finance Bill 2023, the government revised its target for tax revenue to Rs 9,415 billion – Rs 215 billion higher than the previous estimate. Details reported in the press indicate that the government has increased the tax burden on the salaried class, especially those with monthly incomes between Rs 200,000 and Rs 300,000.

The PDM government, like its predecessors, has failed to broaden the tax base by adding new sectors in the tax net by withdrawing tax exemptions and improving enforcement to catch non-filers. Instead, it has relied on the old orthodox approach to extort the maximum from the existing taxpayers.

The tariff for the highest slab for salaried persons is 35 percent, higher than the 29 percent normal corporate tax rate. A salaried individual will now pay at a higher tax rate than companies and large corporations. According to the new tax rates, effective from July 1, salaried individuals earning over Rs 2,400,000 but not exceeding Rs 3,600,000, tax will pay Rs 165,000 plus 22.5 percent of the amount exceeding Rs 2,400,000. Where taxable salaried income exceeds Rs 3,600,000 but does not surpass Rs 6,000,000, tax will be Rs 405,000 plus 27.5 percent of the amount exceeding Rs 3,600,000. For salary income of more than Rs 6,000,000, tax will be Rs 1,095,000 plus 35 percent on the amount exceeding Rs 6,000,000. No change has been made in the taxation of income of the salaried individuals falling in the lower slabs (between Rs 600,001 and Rs 2,400,000).

It has become routine for the government to shift the cost of its failure to the common man by imposing additional taxes. Successive governments have been consistently following this pattern. None have showed an inclination to meet the fiscal gap by initiating fiscal reforms. In these columns, a roadmap for broadening of tax base and collection more than Rs 12 trillion has been highlighted time and again.

The successive regimes, rather than providing relief to the existing taxpayers and attracting investments by rationalising tax rates, have preferred imposing additional taxes on the existing taxpayers in formal sectors — raising tax rates for middle-income salaried individuals being a classic example of putting extra burden on the struggling class.

Taxing the middle-class salary earners is convenient for any government as these are already compliant taxpayers whose tax reaches the government treasury on a monthly basis through withholding agents, i.e., their employers. Hence, without any administrative effort, the government grabs additional funds. On the other hand taxing the informal sector requires the revenue department to put in extraordinary effort. Instead of carrying out some exercise to bring high net worth non-filers into the tax net, add new taxpayers and reduce the monstrous tax expenditure to meet shortfalls, governments have preferred to levy more taxes on the existing salaried taxpayers.

Due to the current economic and political turmoil, Pakistan is experiencing unprecedented brain drain. It is fast losing attraction for local talent/ entrepreneurs and is no longer the choice of experienced professionals. The middle-income salaried class is excessively burdened. In return, they are not given any significant facilities. With their disposable income, they have to pay for health, education and security for themselves and their families. Adding to their tax burden amounts to pushing them to seek respite abroad.

The revised Finance Bill 2023 proposes enhanced rates of super tax up to 2.5 times with rates for the highest slab at 10 percent, in addition to the existing corporate tax of 29 percent. Such regressive measures will adversely impact businesses across all sectors and discourage capital formation and investment in businesses.

Dr Ikramul Haq, an advocate of Supreme Court, is adjunct faculty at the Lahore University of Management Sciences (LUMS)

Abdul Rauf Shakoori is a corporate lawyer based in the USA

Targeting middle-income employees