ISLAMABAD: Another round of discussions between Pakistan and the International Monetary Fund (IMF) ended without resolution due to disagreements over new income tax rates for salaried and non-salaried individuals and the imposition of an 18% sales tax on agriculture and health sector goods.
Income Tax Disputes
The crux of the disagreement centers on the proposed new income tax rate of 45% for individuals earning just over Rs467,000 monthly. Currently, the maximum rate is 35% for incomes over Rs500,000.
The IMF insists on merging the tax slabs for salaried, non-salaried, and other incomes, with a new maximum rate of 45%. However, Pakistan’s government proposes to maintain separate slabs and is resistant to increasing the maximum rate for salaried individuals, showing flexibility only towards non-salaried individuals.
Prime Minister Shehbaz Sharif remains firm against increasing the burden on the salaried class. Under current proposals, the income tax rate for those earning Rs900,000 annually would rise to 7.5% from the current 2.5%, significantly impacting the middle-income group. For higher income levels, the rates would escalate even more sharply, further straining the salaried class which has already contributed Rs325 billion in income tax over the past 11 months. If the revised rates are accepted, this contribution could jump to Rs540 billion in the next fiscal year, a hike that even a 30% pay increase may not offset.
Taxation on Exporters
A consensus was reached on adjusting the tax regime for exporters, who currently pay a 1% final income tax. The IMF proposes treating this as a minimum rate, requiring exporters to substantiate their incomes and expenditures, thereby increasing tax collections.
This move aims to rectify the disparity in the taxation system, which disproportionately burdens the salaried class over wealthy exporters and business individuals. During the first 11 months of the current fiscal year, exporters paid Rs85.5 billion in taxes, significantly less than the Rs326 billion paid by the salaried class.
Sales Tax Issues
No consensus was reached on implementing an 18% sales tax on essential agricultural inputs such as fertilizers, pesticides, and seeds. The government is also resisting the imposition of the same tax rate on medicines, solar panels, and medical and surgical equipment. Implementing an 18% tax on medicines alone could generate an additional Rs130 billion, while taxing medical supplies could yield another Rs100 billion.
Future Discussions
The IMF has asked Pakistan to present alternative proposals if it cannot increase the tax burden on the salaried class. Another round of discussions is expected soon. The IMF’s stance underscores its push for Pakistan to recover higher taxes from non-salaried business individuals, aiming for a more equitable taxation system.
The ongoing negotiations highlight the challenges Pakistan faces in balancing fiscal responsibility with equitable taxation.
The proposed tax changes, particularly those impacting the middle and lower-income groups, underscore the need for careful consideration to avoid exacerbating financial strain on already burdened citizens.
The outcome of these discussions will be critical for Pakistan’s economic stability and its relationship with the IMF.
