The IMF wants to increase the tax burden on the unemployed, employed

• The IMF suggests cutting into slabs from seven to four.
• It estimates it could bring in 0.5% of GDP.
• FBR could increase its revenue, sources say.

ISLAMABAD: The International Monetary Fund (IMF) has proposed to the Federal Board of Revenue (FBR) to double the tax burden on salaried and non-salaried classes, which will affect the middle and upper middle income groups if accepted. The news reported on Saturday.

The global lender recommended raising taxes by removing their distinctions, reducing the number of slabs from seven to four and removing the tax exemption for private employer contributions to pensioners.

The IMF has estimated that if the Personal Income Tax (PIT) recommendations are fully implemented, it could generate an additional revenue of 0.5% of GDP, equivalent to Rs 500 billion annually.

In the current financial year, FBR has so far collected Rs 215 billion from the salaried class in the first eight months (July-February) period of the current financial year.

It is projected that the FBR could get about Rs 300 billion from the salaried class. The IMF’s PIT recommendation could generate an additional revenue of Rs 500 billion from both wage earners and non-wage earners.

Top official sources confirmed The news on Friday that the FBR could increase its revenue by removing exemptions and other preferential tax treatments.

The tax rates for PIT should be simplified and the number of slabs should also be reduced in a uniform progressive manner as suggested by the IMF.

Currently, there are seven tax slabs. When the taxable income does not exceed Rs 400,000 for the salaried category, there is nil tax rate. Where the taxable income exceeds Rs 400,000 but does not exceed Rs 1,200,000, there is a tax rate of 5% of the amount in excess of Rs 400,000. Where taxable income exceeds Rs 1,200,000 but does not exceed Rs 2,400,000, there is Rs 40,000 + 10% of the amount exceeding Rs 1,200,000.

In addition, where the taxable income exceeds Rs 2,400,000 but does not exceed Rs 3,600,000, there is a tax rate of Rs 160,000 + 15% of the amount exceeding Rs 2,400,000. When the taxable income exceeds Rs 3,600,000 but does not exceed Rs 4,800,000, there is a tax rate of Rs 340,000 + 20% of the amount exceeding Rs 3,600,000. When the taxable income exceeds Rs 4,800,000 but does not exceed Rs 6,000,000, there is a tax rate of Rs 580,000 + 25% of the amount exceeding Rs 4,800,000. In the last and seventh slab, where taxable income exceeds Rs 6,000,000, there is a tax rate of Rs 880,000 + 30% of the amount exceeding Rs 6,000,000.

Tax experts believe that if the number of slabs were reduced, it would reduce the progressivity of PIT because the FBR would have to increase the tax rates for income exceeding Rs 2 million, while the maximum rates in the existing slab would apply to income that exceeds Rs 6 million a year.

The IMF has proposed lowering the income threshold for higher interest slabs.

The IMF has asked the FBR to review the Second Schedule and Chapter III of the Income Tax Ordinance (ITO) to remove preferential treatment of employees in certain sectors, tax credit on investment in shares, credit on home loan payments, tax credits for full-time teachers and researchers and keep the nil rate threshold at the same levels if it cannot be reduced.

All these measures could bring 0.5% of GDP in additional revenue to the national kitty.

On the pensions front, the Washington-based lender recommended ensuring that either pension contributions or benefits are taxable. To achieve the targets, the IMF called for either eliminating the benefits from the deduction of voluntary contributions to the employee contribution fund or eliminating the pension exemption and taxing them using one of the alternatives described.

Contacted former FBR Member Tax Policy Dr Mohammad Iqbal said that salary income was taxed on gross basis and no deduction was allowed from salary income in Pakistan while in rest of the world various deductions including personal expenses like the education of the children, are given.

“All other sources of income such as property or business income are reduced by various deductions and expenses and no tax is levied on gross receipts, unlike salary income. In Pakistan, as sources of income are not documented, except salary , no salaried employees are free to declare income and pay tax on it as they choose, while salary income is fully documented and there is no room for sub-declaration,” he added.

Originally published on The news