The International Monetary Fund (IMF) has encouraged Pakistan to reduce the number of tax bands for the salaried and business class from the current seven to four.
However, the plan, if implemented, will negatively impact the medium and upper middle-income classes.
IMF Urges Pakistan To Increase Tax on Salaried Class
According to official sources who spoke with a local newspaper, the IMF took up the subject last week with the goal of more than doubling tax revenue collected from both salaried and company taxpayers.
An IMF expert mission that concluded its two-week assessment of Pakistan’s tax laws last week put out the idea.
According to the sources, the mission also suggested raising the already lower sales tax rates to the regular 18%, with the exception of a few necessities.
IMF Mission
They added that although the visiting mission shared its findings with the federal government before to leaving, the IMF had not yet provided its recommendations in the form of a report.
The IMF anticipated to release its draft report shortly. As of now, this advice is not legally enforceable.
However, in response to a question about the technical mission’s advice to lower the number of personal income tax brackets, IMF Resident Representative Esther Perez remained silent.
Given that the salaried class is already heavily taxed, it appears that the tax authorities are reluctant to implement the IMF’s advice.
The IMF has also recently advocated for higher tax contributions from the real estate and agricultural industries.
Reduction in Tax Slabs
According to sources, the IMF suggested reducing the number of tax slabs from seven to four.
Currently, depending on yearly income, the salaried class income tax rates range from a low of 2.5% to a high of 35%.
The tax burden will rise for those in the lowest and middle slabs, whose tax rates will rise sharply, if the slab count is decreased from seven to four.
Up to Rs. 50,000 in monthly income is tax-free. However, there is a 2.5% tax on an income of Rs 100,000 per month.
Once an individual earns Rs 200,000 per month, the rate rises to 12.5%.
Tax rates are 22.5% for income up to Rs. 300,000 and rise to 27.5% for income over Rs. 500,000 per month.
The rate is 35% for the highest income bracket, which is over Rs. 500,000 per month.
Tax Collection From Salaried Class
Moreover, the FBR collected Rs. 264 billion in income tax from the salaried class in the most recent fiscal year.
Officials from the FBR stated that individuals earning between Rs. 200,000 and Rs. 300,000 per month paid the highest amount of tax.
They said that there would be a significant increase in tax rates for individuals earning between Rs. 200,000 and Rs. 300,000 if two or three tax slabs were eliminated.
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