As soon as there is some talk of budegtary or taxation in Pakistan, a loud lament is heard across the commentariat where the salariat class cries that only they are taxed, only they do pay the tax as it is withheld at source and the tax burden on them is increased in every budget. While there is a lot of truth to how most non-salaried individuals avoid taxation in Pakistan – the wholesale and retail trade sector is one good example – the level of income taxes on paper are astonishing in themselves.
Household income for the top quintile by income group in the last HIES survey stood at Rs 43,858. Let’s say now that for the top 20% households in Pakistan, income stands today at Rs. 50,000.
Based on the new income tax brackets – no deductions counting – such a salary would entail an effective rate of a mere 2.083% (Rs. 5,000 + 7.5% of 100,000). Keep in mind that there is no income tax applicable below Rs. 400,000 annual income at all. And the second top quintile in the last HIES was making ~Rs. 300,000 annually. 92.2% of the workforce does not make enough to pay income taxes.
White collar urban professional income if stands at Rs 150,000 would be a very good enough salary, making possible a fairly luxurious lifestyle and vacations too. The income tax rates at these salaries would be 7.77%. This is a very high earning in Pakistan and even this is being taxed at under 10%. If anyone is crying that 10% is a high income tax rate then they should be shot in the arm with a rubber bullet at least. This is libertarian heaven. And Pakistanis across all sections expect a welfare state. Notwithstanding bad tax collection, we’re talking abysmally low rates in themselves. For the cases mentioned before, last year income taxes would’ve been withheld at 4.5% and 14%.
According to Ishaq Dar, there are only 3,000 people in the highest income tax bracket – people who earn more than Rs 7 million annually ($71,000). If someone earned Rs 12 million in salary – and high salaries are rarer, stock options and other wizardry being the preferred schemes – they would ultimately be paying a mere 24.2% effective tax rate. At a precise Rs. 7 million, the effective tax rate would be just 20.1%. Keep in mind this is the highest possible in a progressive tax regime.
Income taxes paid by salaried individuals make just 3.1% of Pakistan’s dreadful tax revenues. 38.5% of the filers paid an amount less than Rs. 10,000 in income tax. And if they were even paying exactly 10,000 and all of them were making just Rs. 400,000 (qualifying for income tax), the effective income tax rate would be 2.5%. Point being, the majority of the salariat is paying income taxes at comical rates. If the average incomes tax rates were 3x current ones, enough would be generated to feed the BISP and increase allocation for that (3.1% of last year’s revised estimate of 2,108Bn tax revenue collection stands at 62.55Bn).
Paying 10% on average will not kill you. Stop complaining. 17% GST is not a valid excuse to complain either.
For Ahsan: Full-time teachers and researches get a 75% tax liability discount in Pakistan.
Note: The income tax brackets for salaried individuals are taken from the Finance Bill 2013.