Salaried Class Pays Rs 200 Billion in Taxes Amidst Growing Burden

Introduction: The Growing Tax Burden on Pakistan’s Salaried Class
The salaried class in Pakistan has seen a significant increase in its contribution to the national tax revenue, with a staggering Rs 198 billion paid in income taxes over the first five months of the fiscal year 2024-2025. This represents a 57% increase compared to the same period last year, highlighting the escalating tax burden on salaried individuals. However, this surge in tax receipts comes at a time when the Federal Board of Revenue (FBR) is facing challenges in effectively utilizing available data to expand the tax net and ensure equitable tax collection from all sectors.

Rising Income Tax Receipts from Salaried Individuals
Income tax receipts from salaried individuals have risen dramatically, with an increase of Rs 72 billion compared to the previous year. This rise can be attributed to the government’s decision to increase tax rates on salaried workers. However, despite these increases, the overall tax revenue collected by FBR has not met its targets, pointing to inefficiencies in broader tax collection methods and a lack of adequate focus on untaxed sectors.

The Disparity in Tax Collection Efforts
The collection of taxes from salaried individuals has been much more efficient compared to other forms of tax collection, particularly from audits. The FBR has seen a decrease of Rs 5 billion (16%) in tax receipts from audits between July and November 2024. While the salaried class paid Rs 198 billion in taxes, the revenue from audits and other tax collection methods amounted to only Rs 26 billion. This reflects a significant gap in FBR’s approach to tax collection.

Challenges Faced by the FBR in Expanding the Tax Base
One of the main challenges highlighted by experts is the difficulty in using data from electronic transactions, such as utility bills, mobile phone usage, and banking transactions, to identify and collect taxes from non-filers. While the salaried class remains the most reliable source of tax revenue, efforts to extend this model to other sectors have fallen short. Furthermore, FBR’s audit capabilities remain weak due to a shortage of skilled auditors, contributing to its inability to meet targets effectively.

Government Measures to Address the Tax Gap
In response to these challenges, the FBR has taken steps to increase its audit capacity. The FBR is hiring 1,620 new auditors from the private sector to address its staffing shortages and improve audit operations. However, the tax audit process remains slow and inefficient, often taking months or even years to yield results. This makes the reliance on salaried employees for immediate revenue collection even more pronounced.

Impact of Policy Changes on Salaried Individuals
Prime Minister Shehbaz Sharif’s government raised the tax burden on salaried individuals in June 2024. This move has sparked a debate about whether the government should instead focus on cutting expenditures and broadening the tax base by targeting sectors that remain largely untaxed, rather than relying heavily on the salaried class.

Tax Collection Through Salaried Employees vs. Goods Supply
It is worth noting that the taxes collected from salaried employees far outstrip the revenue generated from the supply of goods, a major sector of the economy. In fact, the tax contributions from salaried individuals are 1,423% higher than the combined taxes received from goods suppliers. This points to a significant imbalance in how the tax burden is distributed across different sectors of the economy.

The Importance of Expanding the Tax Base
To ensure sustainable revenue generation, experts suggest that the government must focus on broadening the tax base rather than increasing the burden on a select few. This includes addressing the untaxed informal sectors, where billions of rupees remain uncollected. Without expanding the tax net, Pakistan may face long-term fiscal challenges that could undermine economic stability.

Analysis of the Non-Filer Category and the Income Tax Ordinance
A notable aspect of Pakistan’s tax system is the non-filer category, which targets individuals and businesses that do not file income tax returns. While the FBR has pushed for reforms to remove this category, no changes have been made yet. Non-filers often operate in sectors that evade tax scrutiny, and the government’s failure to amend the Income Tax Ordinance has contributed to inefficiencies in tax collection.

Regional and Sectoral Disparities in Tax Contributions
Tax contributions from various sectors and regions also reveal disparities in the economic landscape. Salaried employees in the public sector, particularly government employees, paid Rs 53 billion in income tax during the first five months of FY 2024-25. This figure represents a 20-25% increase in pay for government workers. Meanwhile, employees in the private sector contributed Rs 145 billion, demonstrating that the salaried class remains the backbone of Pakistan’s tax system.

Corporate Sector vs. Non-Corporate Salaried Tax Contributions
Within the salaried class, the non-corporate sector paid Rs 86 billion, while corporate sector employees paid Rs 59 billion in income taxes during the same period. The rise in tax payments from the corporate sector is particularly notable, with a 56% increase compared to the previous year. These figures illustrate the growing responsibility placed on salaried individuals across all sectors, despite the lack of equivalent efforts to target untaxed businesses.

Provincial Contributions to Income Tax Revenue
Provincial governments have also contributed to the income tax collection. Employees of the four provincial governments paid Rs 33 billion, a significant 109% increase compared to last year. The federal government’s employees, too, paid Rs 20 billion, representing a 71% rise in tax contributions.

FBR’s Audit Capacity and the Need for Reform
To improve its tax collection efficiency, the FBR has acknowledged the need for a stronger audit capacity. Currently, the FBR is severely understaffed in terms of auditors, with a shortage of 1,559 auditors on the domestic taxes side alone. These staffing shortages severely hinder the FBR’s ability to perform timely audits and recover due taxes from various sectors, including the informal economy.

Tax Revenue Projections and FBR’s Shortfall
The FBR’s projected tax revenue for the first five months of FY 2024-25 fell short by Rs 341 billion, a shortfall that is expected to increase by the end of December. With tax collections from salaried individuals increasing, the FBR’s overall performance remains a topic of concern. The use of tax audits, despite being a long-term process, has also seen a decrease in effectiveness.

Conclusion: The Need for Structural Reform
The growing reliance on the salaried class for tax revenue underscores the need for a more equitable and efficient tax system. While the salaried class has proven to be a consistent and reliable source of tax revenue, it cannot continue to bear the brunt of the country’s fiscal needs. The government must prioritize structural reforms in the tax system, focusing on broadening the tax base and improving the efficiency of audits and other tax collection methods. Only through such measures can Pakistan achieve sustainable economic growth and ensure fairness in tax contributions across all sectors.

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FAQs:

1. Why has tax collection from the salaried class increased?
   The increase in tax collection from the salaried class is largely due to higher tax rates imposed by the government, along with the growing number of tax returns filed by salaried individuals.
2. What are the challenges faced by FBR in expanding the tax base?
   The main challenges include inefficiencies in auditing, insufficient staff, and the lack of focus on untaxed sectors, which limits the FBR’s ability to broaden the tax net.
3. How much did FBR collect from audits in the first five months of FY 2024-25?
   FBR collected Rs 26 billion through audits, a decrease of Rs 5 billion compared to the same period last year.
4. What reforms are needed in Pakistan’s tax system?
   There is a need for structural reforms to broaden the tax base, improve audit processes, and ensure more efficient tax collection from sectors that remain largely untaxed.
5. How have provincial employees contributed to tax revenue?
   Employees of provincial governments paid Rs 33 billion in income taxes, marking a 109% increase compared to the previous year

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