Salaried workers paid Rs420 billion in tax in nine months, FBR data shows

ISLAMABAD: Pakistan’s salaried class paid Rs420 billion in income tax during the first nine months of the current fiscal year, according to provisional data compiled by the Federal Board of Revenue (FBR), while the real estate sector contributed Rs197 billion in withholding taxes over the same period despite weak activity in the market over the past two years.

The provisional figures showed that salaried individuals paid Rs420 billion in income tax from July to March. This was Rs29 billion, or 7.5%, higher than the Rs391 billion collected in the same period of the previous fiscal year. According to the data, tax paid by salaried people in the public and private sectors remained more than double the amount collected from the real estate sector during the same period.

The Rs420 billion paid by salaried individuals did not include book adjustments. It also excluded payments made by some contractual employees under Section 153-b of the income tax law.

The salaried class pays about 38% of its gross income in taxes, a burden described as significantly higher than in regional countries and also heavier relative to the real estate sector and retailers. The government has also been deducting two days’ salary per month from its employees to finance fuel subsidies.

Economic pressure on salaried households has intensified as they face higher taxes alongside rising petrol prices and increasing household expenses linked to the Middle East conflict. Transport, kitchen and utility costs have started rising sharply after increases in petrol and high-speed diesel prices following the conflict.

Breakdown of salaried tax payments

The details showed that employees in the non-corporate sector paid the largest amount, contributing Rs187 billion in income tax, up 12% from a year earlier. Corporate sector employees paid Rs134 billion, which was 15% higher than last year.

Provincial government employees paid Rs59 billion in income tax, down 14% from the same period last year. This was the fourth consecutive month in which income tax contributions from provincial government employees had declined. Federal government employees paid Rs41 billion, up 7% compared with last year.

The government’s efforts to widen the tax base have yielded limited results, and it may face resistance from the International Monetary Fund (IMF) if it seeks substantial tax relief for the salaried class. An IMF mission is expected to arrive in Pakistan by the middle of next month to review and approve the budget before it is presented to the National Assembly and the federal cabinet.

Real estate collections and tax proposals

According to the provisional data, the government increased tax rates on the real estate sector under continued pressure, but did not significantly broaden the base and remained largely dependent on upfront withholding tax collection.

Withholding tax collection on plot sales rose 62% to Rs137 billion during July-March. In contrast, withholding tax on plot purchases fell 16% to Rs61 billion after the government reduced purchase-side rates in the budget while increasing the rate on sales.

The government collected only Rs1.7 billion in tax on gains from investments in the real estate sector, compared with Rs5 billion in the previous fiscal year, reflecting the slump the sector has faced over the past two years. Under a constitutionally questionable deemed income tax, the government collected only Rs1.2 billion.

Overall, the government collected Rs197 billion in withholding taxes from the real estate sector in the first nine months of the fiscal year, up 17%.

Prime Minister Shehbaz Sharif has already expressed a desire to abolish the 1% deemed income tax on properties, which has been challenged in courts over its constitutionality. The government will try to reduce withholding taxes on the sale and purchase of properties under Sections 236C and 236K of the Income Tax Ordinance.

There is a strong view in favour of cutting the tax rate on the sale of plots from 4.5% to 1.5%. On purchases, there is a proposal to reduce the rate from 1.5% to 0.25%.

There is also a proposal to abolish transaction taxes on the first ownership of a home or plot of up to one kanal. Another proposal suggests treating housing loan instalments as an expense instead of part of income in order to reduce the tax burden. These proposals are expected to be discussed with the IMF next month.