The Pakistan Business Council (PBC) recently highlighted a stark disparity in the tax burden between salaried individuals in Pakistan and their counterparts in neighboring India. According to PBC’s data, Pakistani salaried employees pay up to 9.4 times more in income tax than those in India, despite similar living costs. This revelation comes on the heels of the Pakistani government’s decision to increase taxes on the salaried class as part of the Budget 2024-25, aiming to raise an additional Rs70 billion in revenue.
New Tax Measures and Comparisons
Under the new Finance Bill 2024, individuals earning over Rs50,000 a month face higher tax liabilities. For instance, someone earning Rs100,000 monthly will now pay Rs2,500 in taxes, up from Rs1,250—a 100% increase. Additionally, a 10% surcharge has been introduced for individuals with annual incomes exceeding Rs10 million. In stark contrast, the Indian government recently reduced income tax rates to stimulate consumption. In India, annual incomes between 300,000 and 700,000 INR are taxed at 5%, compared to the previous rate for income between 300,000 and 600,000 INR.
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The PBC’s comparison revealed significant differences in tax liabilities. For example, in Pakistan, individuals earning up to Rs1.2 million annually face a tax of Rs30,000, whereas in India, the equivalent tax is only Rs3,018. Similarly, those earning Rs1.8 million annually will pay Rs120,000 in Pakistan compared to Rs12,027 in India, reflecting a nine-fold difference. The disparity continues for higher incomes, with individuals earning Rs2.4 million annually paying Rs230,000 in Pakistan, while their Indian counterparts pay just Rs22,072.
Salaried Class Contribution to National Revenue
Despite the heavy tax burden, the salaried class has significantly contributed to Pakistan’s national revenue. Reports indicate that during the first half of the current fiscal year, the salaried class contributed a staggering Rs158 billion in taxes, marking a substantial 38% increase compared to the same period in the previous fiscal year. This amount is 243% more than the taxes deposited by exporters, placing the salaried class as the fourth-largest tax-paying segment, trailing behind contractors, bank depositors, and importers.
Income tax collections from the salaried class have witnessed remarkable growth from July to December. Sindh province alone contributed Rs66 billion, with Karachi leading the way by depositing Rs57 billion, constituting 36% of the total tax. Punjab followed closely with Rs59.4 billion, accounting for 38%, while Lahore contributed Rs33 billion. Additionally, Islamabad, Balochistan, and Khyber Pakhtunkhwa contributed Rs19 billion, Rs4.2 billion, and Rs9 billion, respectively.
Experts anticipate that the salaried class will surpass the Rs300 billion mark in tax contributions by the end of the financial year. Notably, during the first half of the year, the Federal Board of Revenue (FBR) collected a total of Rs1.25 billion in withholding tax, representing 57% of the total income tax collected. Tax collections from contractors and service providers increased by 31%, reaching Rs228 billion, while tax on loan profits surged by 58%, totaling Rs220 billion. Importers also made substantial contributions, paying Rs189 billion in income tax.
Future Prospects and Challenges
The high tax burden on Pakistan’s salaried class has sparked protests and widespread discontent. The PBC has criticized the current tax system as inequitable and failing to provide adequate value for the taxes paid. Finance Minister Muhammad Aurangzeb has promised relief for the salaried group when possible, but with the staff-level agreement for a three-year programme now reached, many believe any relief is still some time away.
The disparity in tax burdens also underscores the broader economic challenges faced by Pakistan compared to India. India’s economy, with a nominal GDP of $3.7 trillion, is much larger and growing faster than Pakistan’s, which has a nominal GDP of $400 billion. India enjoys a higher per capita income, a diverse economy with major contributions from services, and attracts substantial foreign investment. In contrast, Pakistan’s economy relies more on agriculture and manufacturing, experiences higher inflation and currency volatility, and faces significant challenges in infrastructure development and human development indicators.
The recent tax measures have placed a significant burden on Pakistan’s salaried class, highlighting the need for a more equitable and efficient tax system. Moving forward, addressing these disparities and ensuring fair value for taxes paid will be crucial in fostering economic stability and growth.