Pakistan’s tax chief on Tuesday hinted at raising tax rates on the upper middle income for wealthy groups, as the International Monetary Fund (IMF) listed its demands for additional measures, including a increase in personal income tax rates.
The IMF had raised objections to the reduction in income tax rates for salaried persons “but we are trying to protect the people”, who were earning 200,000 rupees a month from any additional charges, said the chairman of the Federal Board of Revenue, Asim Ahmad, during an informal interview with the media.
Ahmad spoke to the media after attending a meeting of the Senate Standing Committee on Finance in Parliament. He said the government was in trouble because the number of people, who were earning more than Rs 200,000 per month, was not very high.
“The small number of people, falling in the highest income brackets, does not provide a sufficient basis to meet the IMF’s request for the generation of additional income from the working class,” the FBR chairman told reporters. .
In the 2022-23 Budget, the government reduced the tax burden on the salaried class and provided relief of Rs 47 billion by increasing the annual income tax exemption cap to Rs 1.2 million and by reducing individual tax rates. However, the IMF demanded the increase in tax pressure to generate more than 120 billion additional rupees from wage earners.
Last year, the 1.2 million employees paid a sum of Rs150 billion in income tax on an average of Rs135,000 per person. Around 730,000 people, who submit their annual tax returns, fell into the Rs 1.2 million annual income bracket, which was now exempt. Nearly one million taxpayers earn up to 2 million rupees per year. This leaves a very narrow base for the government to collect additional taxes.
According to the budget, the government has proposed an income tax rate of 12.5% for those earning more than 2.4 million rupees but up to 3.6 million rupees. From 3.6 million rupees to 6 million rupees, the proposed new rate would be 17.5% and for the range of 6 million rupees to 12 million rupees, the income tax rate has been suggested at 22.5% and for those earning more than 12 million rupees, the rate offered is 32.5%.
The sources said the government is working on a proposal to revise tax rates for those earning Rs 3.6 million and above.
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In a statement on Monday, Ester Perez, the IMF resident representative, said additional steps would be needed to align Pakistan’s budget for the 2022-23 financial year with the key targets of the $6 billion program.
At the request of the Ministry of Finance, the sources said, the IMF had handed over a list of additional measures that Pakistan needed to take to convince the IMF of the viability of the proposed budget and the revival of the programme.
A senior government official said the IMF’s main concerns were over personal income tax rates, continued fuel and electricity subsidies and the reliability of budget figures.
The IMF has asked Pakistan to show a primary fiscal surplus, which the government has reflected at 152 billion rupees for the next financial year, but the global lender doubts the credibility of the figures. Furthermore, the provincial budgets presented so far make this figure of Rs 152 billion primary surplus unrealistic.
Abdul Rehman Warraich, former director general of debt at the Ministry of Finance, said on Tuesday that four variables were necessary for debt sustainability: the real GDP growth rate, the real cost of borrowing, the real exchange rate and the primary balance.
Speaking at a webinar hosted by KASB Securities, Warriach pointed out that the right combination of these variables is necessary for sustainable debt levels. He said the cost of borrowing should be lower than the growth rate of real GDP and the currency should not experience major fluctuations. “Due to high debt levels, the country should run a primary surplus to ensure debt falls to sustainable levels,” he added.
Pakistan’s cost of borrowing has ranged from 4% to 5% of GDP and is expected to exceed 5% in 2022-23 after a sharp rise in interest rates. Warriach pointed out that this increase was concerning, given that the acceptable budget deficit for any economy was 3% of GDP.
Pakistan’s borrowing costs are relatively high – currently hovering around 16% – the interest expense to income ratio has already crossed the 80% mark.
As Pakistan’s interest service already exceeds 5% of GDP, Warraich suggested that all signals point to tighter fiscal discipline by the federal government. He suggested that a few years of primary surpluses, coupled with high economic growth rates, would significantly improve Pakistan’s financial health.