Dr. Ikramul Haq
It is worth mentioning that while middle-class salaried employees are facing the highhandedness of Revenuecracy [they are the de facto legislators as far as tax laws are concerned as our worthy elected members while passing finance bills or tax law amendments bills act only as rubber-stamps], the privileged classes enjoy unprecedented tax-free perquisites and benefits—Budget 2024-25: Government Intent On Squeezing The Salaried Class, Friday Times, June 8, 2024
The International Monetary Fund (IMF) has asked Pakistan to tax the salaried and business individuals at a single income threshold by lowering the highest taxable income limit of the salaried people, which will result in charging a 35% income tax rate at a monthly income of Rs333,000—IMF aims to milk more taxes from salaried individuals, The Express Tribune, May 8, 2024
Tax rates enhanced by the Finance Act, 2024 in the case of “salary” income [as defined in section 12(2) of the Income Tax Ordinance, 2001] for middle-level employees were brutal, extortionist, discriminatory, and expropriatory. The existing taxation of salaried class is, undoubtedly, unconstitutional in terms of Articles 4, 14, 18, 23 and 25 of the Constitution of Islamic Republic of Pakistan [the “Constitution”], especially with unbearable burden of indirect taxes and high cost of utilities, eatables and items of daily use.
Now, the news is that the forthcoming federal budget for fiscal year 2025-26 [Budget 2025], expected in the first week of June 2025, would bring relief for middle-income salaried persons. Everyone expects it would be meaningful and substantial to overcome economic hardships faced by the poor and the middle-class.
An attempt is made in this article to make a case of tax relief for hard-pressed salaried persons, suggesting a comfortable tax regime, with the hope that those matter in the Land of Pure would consider these in the Budget 2025.
Educational expenses: The salaried people are compelled to spend sizeable amounts from their limited salary on the educational needs of their children at school level (which primarily is the duty of the State under Article 25A of the Constitution). This portrays the apathy of our government towards the salaried persons, who constitute overwhelming majority of the middle-class in the country.
On the contrary, unprecedented tax breaks and benefits have been extended to the wealthier echelons of society. The salaried persons should be entitled to deduct the entire amount of educational expenses incurred by them provided they furnish receipts of fee and other expenses.
The government must give liberal incentives for educational investments to industrial houses so that they can make their workers highly skilled and educated. Educational allowance to employees should be tax-free and not be considered as perquisites. We can change the fate of our nation in a few years if education-related tax benefits are made core of the government’s tax policy.
Medical expenses: Healthcare and its insurance is another important area that needs to be promoted through liberal tax incentives. At present, the following is tax-free:
- free provision to the employee of medical treatment or hospitalization or both by an employer; or
- reimbursement received by the employee of the medical charges or hospital charges or both paid by him, where such provision or reimbursement is in accordance with the terms of employment
The condition for claiming above as tax-free is that the employee provides National Tax Number of the hospital or clinic along with employer’s certificate attesting the medical or hospital bills.
Alternately, any medical allowance received in cash by an employee not exceeding ten per cent of the basic salary of the employee is tax-free, in case free medical treatment or hospitalization or reimbursement of medical or hospitalization charges are not provided in the terms of employment. However, if an employee spends more than these fixed limits, he/she has to pay tax on it, which is highly unjust.
The employers should be encouraged through tax benefits to extend medical facilities to their employees and family members dependents on them. Such expenditure should be treated neither as perquisites nor as taxable receipt in the hands of the employees. Now even 50% of gratuity paid by employer in an approved fund of the employee is disallowed in its hands, which is not only cruel, anti-worker but also unconstitutional. This should be remedied in Budget 2025.
Conveyance allowance: Presently, conveyance allowance is taxable. Salaried persons travel long distance to earn their livelihood. They genuinely incur substantial amount out of their pay on commuting between home and office. Tax-free conveyance allowance, in view of present level of prices, should be Rs. 56,000 per annum. It will be material relief where no conveyance is provided.
Non-taxation of interest-free or concessional loans: Section 13(7) of the Income Tax Ordinance, 2001 taxes the notional benefit arising out of riba-free or concessionary loans given to employees that is violative of Article 25 and Article 38(f) of the Constitution. This provision is confiscatory and violative of the equality principle. It is also against Article 38(f) that requires the State to eliminate riba (usury) before January 1, 2028. This provision of law is against all norms of law, justice and equity. It is pertinent to mention that the Central Board of Revenue (CBR) under the repealed Ordinance of 1979 issued a Circular Letter 4(8)IT-J/91 dated June 30, 1991 opining that “…it is not desirable to tax such notional income…”. The same position should be restored.
Threshold limit: Salaried individual should not be taxed unduly as they cannot claim any kind of expenditure against their pay, though they expend some part of it purely for employment purposes. In their case, minimum taxable threshold should be more than other persons who can claim a host of tax-deductible amounts.
The employee in view of this should not be taxed up to gross taxable salary of Rs. 1,200,000 and tax slabs in their case should be as under:
- Rs. 1,200,001 to Rs. 3,000,000 5%
- Rs. 3,000,001 to Rs. 6,000,000 15%
- Rs. 6,000,001 and above 25%
The salaried class deserves a far better tax deal than what they receive at present. It should be given appropriate tax relief for expenditure incurred on their children’s education and health care of family members as well in terms of conveyance allowance where the employer provides no facility.
The facilities of education and health and affordable transport are the responsibility of the State but in Pakistan (and we call it Islamic Republic!) the masses are forced to expend from their meager incomes to avail these. Obviously, there is no reciprocity of taxes as is the case in all social democracies of the world.
For the contribution salaried persons make to the society, their income should be taxed rationally and in no way should it be to their disadvantage. All such expenses that are actually incurred wholly and exclusively for the performance of employment should be allowed as a deduction.
A software engineer working as an employee needs to spend a lot to keep his knowledge up to date, yet no provision is available for claiming cost of expensive programmes and certifications, one has to obtain, and the same is true for all other professionals deriving salary income.
In IT industry any highly paid software engineer, capable of bringing enormous foreign exchange for the country, would be discouraged to work in Pakistan merely for existing unjust tax burden. There is an urgent need to rationalize our tax policies towards the salaried class.
They contribute substantially towards economic growth and social development and we should not harm their productivity by regressive and unjust tax measures. As the great genius in tax field late Nani Palkhiwala in his book, We The Nation The Lost Decades, rightly said that ‘the budget is a harbinger of good times to come’, one hopes Budget 2025 will address at least some of the key issues pointed above to provide much-needed relief to hard-pressed salaried class.
The coalition government of Pakistan Muslim League Nawaz (PMLN), led by Prime Minister Shehbaz Sharif, in its first budget raised taxes across the board on the alleged dictates of International Monetary Fund (IMF). The finance ministry, headed by Muhammad Aurangzeb, a technocrat with a career in banking, presented his maiden budget for the fiscal year 2024-2025 on June 12, 2024 with clear message that under the IMF programme Pakistanis would have to face some untoward hardships, but there was no other option.
Muhammad Aurangzeb failed to acknowledge that the powerful civil-military bureaucracy, higher judiciary and political elite received Rs. 1800 billion in the fiscal year 2022-23 as perquisites and benefits from public exchequer. Not only this, these powerful segments did not pay a single penny as tax on benefits received free or at concessional rates, in utter violation of section 13(11) of the Income Tax Ordinance, 2001.
Section 13(11) of the Income Tax Ordinance, 2001 reads:
“Where, in a tax year, property is transferred or services are provided by an employer to an employee, the amount chargeable to tax to the employee under the head “Salary” for that year shall include the fair market value of the property or services determined at the time the property is transferred or the services are provided, as reduced by any payment made by the employee for the property or services”.
Section 39(1)(j) of the Income Tax Ordinance, 2001 declares the following as income chargeable to tax:
“The fair market value of any benefits, whether convertible to money or not, received in connection with the provision, use or exploitation of property”.
The second-time Prime Minter Shehbaz Sharif despite tall claims to uproot corruption failed to order his handpicked Chairman of the Federal Board of Revenue (FBR) for recovery of lost revenue of amount due from all servants of State who received plots or lands or any other benefit free or at a concessional rate. They are liable to pay due tax under section 13(11) and section 39(1)(j) of the Income Tax Ordinance, 2001 for such benefits.
It is surprising that till today Shehbaz Sharif has not ordered a probe that how many officers of BS 20-22 have been taking benefit of clause (27) of Part II of the Second Schedule to Income Tax Ordinance, 2001 of reduced rate of 5% on ‘Compulsory Monetization of Transport Facility’ as well as using official transport? It should be ascertained by the Public Accounts Committee as to why this matter of abuse of law was not brought to the notice of the Government and Parliament. Why did the officials of FBR not apprise the Finance Minister about this clause that benefits officers in Grade 20 to 22? IMF obviously is least pushed to force the government to end all tax exemptions, concessions and waivers available to the privileged classes under all tax codes that can substantially increase tax collection by reducing monstrous tax expenditure in fiscal year 2023-24 of nearly Rs. 4 trillion.
Since 1991, income taxation in Pakistan is largely converted into indirect taxation to benefit the rich—this was done by Nawaz Sharif and thereafter all regimes including that of late General Pervez Musharraf retained it in the Income Tax Ordinance, 2001. The presumptive and minimum tax, in reality, is indirect tax. For example, a contractor pays fixed rate of income tax on gross value of contract—the burden falls on the contractee who withholds the income tax and deposits with FBR. On the same amount, sales tax is paid to the province where activity takes place. Thus, the contractee ends up paying 30-35% tax on gross value!
In any democracy, the State is bound to provide healthcare to all its citizens as its constitutional obligation, explicitly explained by Supreme Court of Pakistan in Shehla Zia v WAPDA (PLD 1994 SC 693). It is binding under Article 189 of the Constitution. Employers providing free healthcare to their employee or giving 10% fixed medical allowance of basic salary should be encouraged and be given more tax incentives.
Even for self-employed persons or those having limited/fixed income sources, the impact of regressive indirect taxes, especially sales tax on utilities, eatables (including milk), items of daily use, medicines and educational tools, is disastrous. It can safely be concluded that taxation in Pakistan as it stands now is extremely anti-people, anti-business and anti-growth. It is without any doubt devastating for the poor, middle-class and now even upper-middle class.
What makes the situation more painful is the fact that tax-free allowances, perquisites and benefits available to the privileged classes are not only retained, but also increased over the period. It is necessary to mention that the privileged few are parasitic, thriving on taxpayers’ money and/or funded through costly borrowed money, burden of which is ultimately borne by the ordinary citizens.
Section 12(2)(f) of the Income Tax Ordinance, 2001 includes pension in the definition of salary, thus making is taxable at the normal rates. However, clauses (8), (9), (12) and (13), Part I of the Second Schedule to the Income Tax Ordinance, 2001 exempt pension or its commutation without any quantum in the hands of members of armed forces, civil servants and judges of High Courts and Supreme Court, even if they get employment after retirement or enjoy any other source of income or even more than one pension!
For ordinary citizens, pension is exempt, if received from a former employer, other than where the person continues to work for the employer (or an associate of the employer). In case where the person receives more than one such pension, the exemption applies only to the higher of the pensions received.
The government could have avoided exorbitant income tax on the salaried persons in Budget 2024 by taxing the rich exempt pensioners [total cost of it as per ‘FBR’s Tax Expenditure Report 2024’ was Rs. 78.34 billion]. It was also necessary to bring equity among salaried class. The current year federal budget 2024 allocated for pension a whooping Rs. 1014 billion, out of which Rs. 662 billion is for military and Rs. 220 billion for civilians.
Unfortunately, in Pakistan, the burden of taxes has continuously been increased on the less privileged classes, especially on the safaid-posh (white-collar) salaried individuals and members of lower and middle classes with a fixed income. On the contrary, the rich and mighty are paying meagre amounts. Members of militro-judicial complex and parliamentarians are enjoying extraordinary tax-free perquisites and benefits—nobody speaks about this ruthless wastage of taxpayers’ money.
Salaried people are compelled to spend sizeable amounts from their salary on the educational needs of their school going children (which primarily is the duty of the State under Article 25A of the Constitution) and yet tax credit for the whole amount is not available under section 60D of the Ordinance and restricted to taxable income of Rs. 1.5 million. This portrays the apathy of our government towards the salaried class that constitutes an overwhelming majority of the middle-class in the country. On the contrary, unprecedented tax breaks and benefits have been extended to the wealthier echelons of society. It also confirms hollowness of the claims of the present government that it is committed not to increase the tax burden of employees and tall claims of prioritizing education and health of all citizens. The reality speaks otherwise as discussed above.
The higher tax slabs for salaried persons and impact of cost-pushed inflation due to regressive taxes have been affecting all employees, including those in public sector, nullifying the increase in pay. But those in Grade 20-22 are still enjoying special concession under clause (27) of Part II of the Second Schedule to the Income Tax Ordinance, 2001 which says: “The tax on payments under the Compulsory Monetization of Transport Facility for Civil Servants in BS-20 to BS-22 (as reduced by deduction of driver’s salary) shall be charged at the rate of 5% as a separate block of income”.
It is worth noting that on the one hand, millions of salaried persons, having no other source on income, are funding their dependent children for education, are brutally taxed. On the other hand, all allowances, including special judicial allowance, as well numerous benefits in kind and pensions of our highly paid judges of the Supreme Court and High Courts are totally exempt under clause (55) & (56), Part I, Second Schedule to the Income Tax Ordinance, 2001. The same is the case with hierarchy of armed forces under clause (51) & (52), Part I, Second Schedule!
Section 13(11) and 39(1)(j) of the Income Tax Ordinance, 2001 requires that fair market value of any benefit provided free of cost or at a concessional rate to any employee shall be added in his income. Recovery of lost revenue of billions due from servants of State, who received free or concessional plots or lands or any other benefit(s) and withdrawal of exemptions of billions of rupees available to mighty sections of society, can create sufficient resources to give targeted relief to the poor and needy, as well as substantially reduce the tax rates, especially of the salaried class in the budget 2025.
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Dr. Ikramul Haq, Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.