After the IMF’s rejection, the government will reconsider salary tax relief

Islamabad: The International Monetary Fund (IMF) has completely rejected the government’s proposed salary tax relief in the Personal Income Tax (PIT) to the tune of Rs47 billion, leaving the government with little choice but to reconsider the idea, according to The News.

While the Federal Board of Revenue (FBR) has provided relief to salaried workers earning up to 1.2 million rupees per year, top official sources claim that the IMF has expressed strong reservations about the planned PIT rate.

The Proposal

To provide relief to the urban middle class, the Fund proposes that the relief be limited to persons earning up to Rs0.2 million per month and that tax rates in other slabs be raised afterward.

In contrast to the broader agreement reached with the IMF during the PTI-led government’s sixth review, which was used as a structural benchmark under the Fund agreement, the FBR proposed relief to those earning up to one million rupees per month in salary through Finance Bill 2022 in Parliament in the budget for 2022-23. However, if the proposed PIT rates are not adjusted, it could become a major roadblock to reaching an agreement with the IMF at the staff level.

IMF Demands to Improve Tax Collection

The IMF wanted to improve tax collection by Rs125 billion by progressively putting PIT, but the government went the other way, making it impossible for both parties to get a staff-level agreement under the $6 billion Extended Fund Facility with the current PIT proposal.

According to the Finance Bill 2022, those earning up to Rs1.2 million will pay only Rs100 in tax. Previously, those earning up to Rs800,000 per year had to pay Rs10,000, those earning up to Rs1.2 million Rs30,000, and those earning up to Rs2 million Rs120,000. According to the suggested rate, a salaried worker earning Rs2 million yearly will only have to pay Rs56,000.

Tax Liability

The tax liability for salary earners up to Rs3 million was formerly Rs282,000 per year, but now it is proposed to be reduced to Rs159,000. Up to Rs4 million in salary, a salaried worker, had to pay Rs470,000 in income tax, but under the proposed rate, the tax payment is reduced to Rs304,000. The tax due for a salaried worker earning up to Rs5 million was Rs670,000, but it was cut to Rs479,000 under the proposed rate.

Salary Tax Relief

The tax rates proposed in the Finance Bill 2022 continued to provide relief up to Rs. one million in salary person’s income who had to pay Rs1.845 million in tax. Still, the tax liability has been reduced to Rs1.554 million for salary income up to Rs. one million per month under the proposed Finance Bill 2022. The planned tax rates were amended upward in the remaining slabs up to Rs20 million, Rs40 million, Rs60 million, and Rs80 million.

Breaking the Impasse with IMF

When contacted, Dr. Khaqan Najeeb, former Director-General of the Ministry of Finance’s Economic Reform Unit (ERU), stated the only option to break the impasse with the IMF would be to make adjustments to the proposed slabs, which would be a pre-requisite for reaching an agreement with the IMF. He clarified the adjustments, stating that the assistance should be granted at a monthly rate of Rs0.2 million.

Breakdown of Finance Bill 2022

The FBR increased the taxable ceiling limit from Rs600,000 to Rs1,200,000 in the Finance Bill 2022, and the number of slabs was lowered from 12 to 7 under the Personal Income Tax system.

According to new slabs introduced for the salaried class, there would be no tax if taxable income does not exceed Rs600,000. However, there will be a tax of Rs100 if the taxable income surpasses Rs600,000 but does not exceed Rs1,200,000.

How the Proposed Finance Bill will Reflect?

There will be a 7% tax on the amount above Rs1,200,000 if the taxable income exceeds Rs1,20,000 but does not exceed Rs2,400,000.

If your taxable income is over Rs2,400,000 but not over Rs3,600,000, you would be charged Rs84,000 + 12.5 percent of the amount over Rs2,400,000 per year. The FBR will levy a tax of Rs234,000 plus 17.5 percent of the amount over Rs3,600,000.

If your taxable income is more than Rs6,000,000 but not more than Rs12,000,000, the FBR will deduct Rs654,000 plus 22.5 percent of the amount over Rs6,000,000. When taxable income reaches Rs12,000,000, the FBR will assess a tax of Rs2,004,000 plus 32.5 percent of the amount over Rs12,000,000 every year.

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