Tax cut. Design: Ibrahim Yahya
ISLAMABAD:
Prime Minister Shehbaz Sharif has given a go-ahead to seek the International Monetary Fund (IMF)’s consent for abolishing the super tax and reducing the income tax rate for salaried persons by 5%, in a move that provides some solace to overly taxed segments of society.
The premier on Saturday chaired a meeting on the proposals that would be pitched before the IMF next week for its endorsement to lower the tax burden. Sources said PM Sharif asked the tax authorities to further fine-tune some of the proposals with private sector consultants before sharing them with the IMF.
They said the government wanted to abolish the super tax for wealthy individuals and the corporate sector. The proposal would now be taken up with the IMF after the endorsement by the prime minister.
In addition, the government is also considering reducing the maximum income tax rate for the highest salaried income group by 5% to 30% and increasing the slab amount where the new maximum 30% rate would apply. In the last budget, the government had nominally reduced the income tax rate for low-income earners but it did not reduce the real burden on people.
The government had a desire to reduce taxes in the range of Rs1.5 trillion to Rs1.8 trillion but it is highly unlikely that the IMF would give such huge space, particularly when the Federal Board of Revenue (FBR) is failing on almost every front.
The rising share of direct taxes in the past three years has mainly been financed by unprecedented higher tax collection from the salaried class through exceptionally high tax rates. Power brokers, including retailers and the real estate sector, either continue to remain outside the tax net or pay much lower rates. Those who have the power not to pay, do not pay, wrote economist Sajid Amin in his new paper.
The growth of direct taxes, mainly coming from the salaried class, creates an illusion that the direct tax share is increasing more than indirect taxes, according to the paper written by Amin that Germany’s EFS published this week.
Sources said the government also cleared the proposal to reduce the 1% deemed income tax on the property sector, which is also challenged in various courts. According to another proposal, the 1% advance income tax on exports might be abolished, subject to the IMF’s endorsement, sources said.
The capital value tax on foreign assets is also under consideration to be abolished, sources added.
The government had initially wanted to reduce the sales tax to 15% and cut the corporate income tax rate to 25%. However, there is a chance these two proposals might be deferred for the future.
According to provisional data compiled by the FBR, salaried individuals paid Rs315 billion in income tax during the July-January period of the current fiscal year. This was Rs30 billion, or 10.5%, more than the already higher base of Rs285 billion recorded in the same period of the last fiscal year.
Tax contributions by salaried persons in both the public and private sectors remained more than double the taxes paid by the real estate sector during the same period, according to provisional figures.
Pakistan’s salaried class remains unduly burdened and is a victim of the government’s lethargic approach, which places the burden of tax collection on the existing pool of taxpayers, mainly salaried individuals and manufacturers.
The salaried class pays about 38% of its gross income in taxes, which is significantly higher compared with regional countries and relative to the real estate sector and retailers.
Sources said that during the ongoing discussions with the IMF there was dissatisfaction with the performance of the FBR. During the last mission, the IMF had reduced the tax collection target by Rs216 billion to Rs13.9 trillion. After its poor show during the first seven months of this fiscal year, the FBR again sought a further Rs430 billion reduction in the target.
The FBR now wants its new tax target to be Rs13.5 trillion, although its internal assessment suggested the collection may still not exceed Rs13.2 trillion. Two consecutive meetings were held with the IMF this week where both sides discussed options for filling the fiscal gap that was undermining the annual primary surplus target.
The finance ministry was hoping it could collect an additional Rs150 billion to Rs200 billion from the petroleum levy due to rates exceeding Rs80 per litre.
The government was charging Rs85 per litre levy on petrol, which increased to a record Rs106 on Friday.
Sources said the IMF wanted to set a tax target of over Rs16.2 trillion, or 11.7% of GDP, for the FBR. However, final discussions would take place in the coming week.
