ISLAMABAD: The government may not be able to provide any significant tax relief to all affected people and businesses while remaining within the International Monetary Fund (IMF) programme and is now considering limiting it largely to the salaried class and industrialists.
Tax Relief Proposals Under Consideration
Government officials told The Express Tribune that tax authorities have shared a list of relief measures with the prime minister, leaving the final decision to him. The finance ministry will take up the final list with the IMF for endorsement before June 10.
The proposed relief list includes adjustments for the salaried class, mainly for those earning between Rs200,000 and Rs300,000 monthly, abolishing the 15% dividend income tax on companies, withdrawal of the 1% tax for exporters, and potential tax reductions on mobile phones. There are also proposals to reduce the corporate income tax rate and super tax.
Sources added that the choice could be between a headline number of abolishing the 15% dividend income tax or partly lowering corporate or super tax rates, which may not have a big impact.
Salaried Class Relief Options
Three different proposals exist for providing relief to salaried persons. The base proposal is to cut the income tax rate on monthly salaries between Rs200,000 and Rs300,000, affecting about 550,000 taxpayers. This class is considered part of the middle-income group, heavily burdened by taxes and energy prices.
- For up to Rs267,000 monthly income: reduce rates by 4%.
- For up to Rs341,000 monthly income: reduce rates by 5%.
- For over Rs342,000 monthly income: cut tax rate by 5%, add a new slab, and relax the highest income slab limit.
The second proposal is to enhance the threshold of monthly income of Rs342,000, where the maximum 35% rate plus 10% surcharge hits hardest. The IMF is willing to relax the ceiling to Rs467,000 a month, but the government wants further relaxation.
About 160,000 individuals fall in the highest income tax bracket. The government considers introducing a new income tax slab for up to Rs583,000 monthly earnings at a 32% rate, with the maximum 35% rate applied to income over Rs583,000. Abolishing the 10% surcharge on the 35% highest income tax is also under consideration.
Other Relief Measures
The government must decide whether to reduce the punitive 55% total tax on mobile handset imports. The FBR charges over 55% of mobile phone prices in taxes across six price bands, from $30 to over $500. On a minimum value of $700, the FBR imposes a Rs16,000 mobile levy, Rs22,000 regulatory duty, Rs11,500 withholding tax, and 25% sales tax. The FBR collected Rs18 billion from mobile phone taxes last fiscal year.
There are few chances for tax relief in real estate, especially after property valuation rates were rationalized and exemption certificates issued to non-resident Pakistanis.
One of the largest relief measures could be abolishing the 15% dividend income tax, which large firms pay on dividends to parent companies, with an estimated revenue impact of Rs90-100 billion. If the government picks this big-ticket item, it may not have space for cutting the current 29% corporate income tax rate and 10% super tax rate.
Another relief measure could be abolishing the 1% advance income tax on exporters, with a revenue impact of around Rs80-85 billion, depending on fiscal space.
Pending Decisions
Pending decisions include whether to increase sales tax rates on paper (excluding newspapers) and stationery items at the import stage, and introducing a third tier of federal excise duty on cigarettes. The government is divided on the latter and seeks monetary guarantees from compliant tobacco manufacturers.
There may be no reduction in the 20% federal excise duty on juices and aerated water, which has hurt these units since 2023. Another decision is whether to increase sales tax rates on hybrid and electric vehicles, with a likelihood of an increase for hybrids.
The final decision will be taken within a couple of days after discussions with the IMF conclude.
