Govt Poised to revoke tax concessions favoring high earners

tax concessions in Budget

Govt Poised to revoke tax concessions favoring high earners

ISLAMABAD, May 28,2024: The government is anticipated to revoke tax concessions that disproportionately benefit high-earning individuals over the middle-class workforce, sources informed Dawn on Monday. This move comes following recommendations from the International Monetary Fund (IMF).

The IMF has suggested that the government treat salaried employees’ incomes similarly to non-salaried individuals’ incomes as personal income. However, the Federal Board of Revenue (FBR) opposes this recommendation, arguing that both income types cannot be considered equivalent. If the IMF’s directive is implemented, the tax burden on the salaried class would increase significantly.

Revenue measures amounting to Rs500 billion have been devised for the 2024-25 budget. However, the final amount will be determined after receiving the IMF’s projections for the revenue collection target. Unlike previous practices, the Ministry of Finance is now responsible for computing tax recommendations, rather than the FBR.

The federal budget for the next fiscal year 2024-25 will be presented in the National Assembly on June 8. Finance Minister Muhammad Aurangzeb will present the budget. According to sources, the debate on the budget will begin from June 10. The budget will be approved after Eid-ul-Adha by the end of June. Will be taken in a week.

FBR Proposes Rs500bn Revenue Increase for FY25
FBR forecasts indicate that autonomous revenue collection, based on GDP growth and inflation, will surpass Rs1,150 trillion in FY25. The federal government will consult with the IMF before finalizing any revenue measures. In the last budget, the government announced Rs415 billion in revenue measures. For the upcoming budget, the FBR has suggested raising the tax exemption limit for the salaried class to Rs1.2 million, though this may be adjusted to Rs900,000 from the current Rs600,000 due to rising inflation.

The FBR has also discussed pension tax mechanisms with the IMF. The IMF aims to align the salary slabs with pensioners’ incomes. However, the FBR’s focus is limited to federal government employees, whose pensions total approximately Rs700 billion. The FBR has proposed an alternative method for taxing wealthier pensioners instead of introducing a salary slab.

In the private sector, large companies also provide pensions to their employees, but no final decision has been made regarding pension-related tax changes. The finance ministry is in ongoing discussions with the IMF on this matter, and the FBR has yet to calculate the revenue impact of a potential pension tax.

Eliminating Tax Exemptions
The FBR has shared data on potential revenue gains from withdrawing various tax exemptions with the IMF. The IMF has urged the FBR to collect taxes from traders and wholesalers, who currently contribute minimally to tax revenues.

No agreement has been reached regarding increased regulatory tariffs on imports, as the IMF generally focuses on sales and income taxes, particularly withholding taxes. Presently, sales tax exemptions exceed Rs1.2 trillion. The government faces tough choices in potentially revoking exemptions on food, international agreements, and pharmaceutical products. However, items such as insecticides and solar panels may become subject to sales tax.

The government also plans to raise existing withholding tax rates and introduce new ones, such as reinstating the tax on bank cash withdrawals, to maximize revenue. Additionally, the finance ministry is considering taxing the import of previously exempted raw materials and increasing rates on existing ones.

Previously, the PTI government removed the raw material tax to boost exports and industrialization. The current administration’s potential reversal of these exemptions reflects its need to balance revenue generation with economic growth.