Pakistan government should learn from the global examples to reduce a disproportionate tax burden on the country’s salaried individuals.
ByAsif Javed | March 2025
Pakistan’s tax-to-GDP ratio is among the lowest in the global comparison. During FY 2023-24, the ratio was merely 9.5%, demonstrating the narrow tax base due to tax collection and policy implementation issues. There are only 62,000 sales tax registered persons in Pakistan, of which only 42,000 are active. However, even those registered people do not pay their taxes in full.
The major dependence in tax collection remains on indirect tax revenue which constituted around 70% of tax collection during FY 2024. Hence, successive governments remained unable to mobilize direct taxes. Withholding taxes have a share of 60.5% in income tax collection during FY 2024.
The Federal Board of Revenue (FBR) observed a 26% growth in tax collection during July-December 2024. However, the government still missed the IMF target of Rs. 23.4 billion for the same period. Compared to the previous year, tax collection was Rs. 1.16 trillion more than last year.
The report by Karandaaz on taxation pointed out that businesses in Pakistan need to file 18 annual returns for income tax, withholding tax, and sales tax on goods- monthly for sales tax and quarterly for withholding and income taxes. Businesses in the services sector face an even more complex tax regime as they have to file 61 returns annually for provincial sales tax.
The Competition Commission of Pakistan’s 2023 report highlighted the complex regulatory environment faced by businesses in the country, specifically small and medium enterprises (SMEs). The manufacturing sector is burdened by at least 12 regulatory layers, with foreign firms facing four additional processes. Many laws and various regulations enforced by multiple organizations act as significant barriers.
In Pakistan, salaried persons disproportionally face the burden of taxation as the high tax burden leaves them with low disposable income. The 2024 budget changed the taxable income limit, through which individuals earning above the threshold of Rs 50,000 per month are now liable to pay income tax. The proposed increase is from 2.5% to 5% on all income earned above Rs 50,000 in this bracket. Tax slabs for non-salaried people have also been changed, where tax rates increased from 15% to a maximum of 45%.
During the first quarter of the existing fiscal year, the salaried class contributed a significant amount of Rs. 111 billion, which is 1,550% more than the taxes paid by the traders. Out of this amount, Rs. 28 billion in income tax has been paid by the public sector employees, including federal and provincial. The remaining amount has been paid by the private sector employees who bear the inflationary trend with the stagnant income level. On the one hand, there is no tax relief for the salaried and non-salaried persons. In contrast, the effective income tax rate for salaried persons went up to 39%, for the association of persons to 44%, and for non-salaried persons to 50%.
The regional income tax policies for salaried persons vary across the countries and mainly depend on factors such as economic conditions, fiscal policies, and socio-economic conditions of the population. India has given relief to lower-income groups by exempting them from paying income tax, while a lower taxation rate is applicable for salaried persons up to a certain amount. Their tax structure is progressive, which has multiple tax slabs and provides specific benefits to ease the fiscal pressure on lower- and middle-income groups.
Providing relief to middle and lower-income groups can promote consumer spending and economic growth in Pakistan.
High taxes on salaried individuals cause increased financial stress and a lack of savings among the particular income group. The lack of resources due to the excessive tax burden has affected the ability to spend on basic necessities of life, including health and education. Furthermore, disproportionate taxation also raises income inequality, further affecting society. The middle and lower-income groups perceive that they are unjustly taxed, while other segments of society that can pay or be brought under the tax net still do not oblige their tax liabilities.
Looking at global practices, it can be observed that providing relief to middle and lower-income groups can promote consumer spending and economic growth in the country. Some European nations have also faced public protests due to high taxation on the salaried class, where voices have been raised for tax reforms to enforce a more equitable structure. The government of Pakistan should learn from the global examples to reduce a disproportionate tax burden on salaried individuals.
The government should broaden the tax base by improving the audit capacity of the FBR. Aligning federal and provincial tax policies will help address tax collection disparities. Broadening the tax base is also important to bring economic stability, social equity, and economic growth to the country. The extensive size of the informal economy is a major reason for the lower tax base and loss of revenue. The government should enforce measures to expand the footprint of the digital economy and formalize economic activities.
Based in Islamabad, the writer is a senior research associate at the Sustainable Development Policy Institute (SDPI). He can be reached at asifjaved@sdpi.org
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