A significant storm is brewing in tax landscape, with leading experts and professional bodies raising serious concerns over what they term an “unjust” policy of taxing salaries on the gross amount rather than net take-home pay. This long-standing method, critics argue, is causing immense financial strain across the nation’s salaried class.
Leading the charge for reform is the Institute of Chartered Accountants of Pakistan (ICAP), which has boldly questioned the rationale behind this taxation method in its comprehensive budget proposals for 2025–26.
ICAP contends that while the policy of gross salary taxation was initially balanced by relatively lower tax rates, successive governments have incrementally increased both income slabs and tax percentages without concurrently restoring critical exemptions and allowances. This, experts warn, has transformed what was once a reasonable framework into a burdensome trap for hardworking professionals, squeezing their real income.
Withdrawal of Tax Credits Deepens the Wound
The situation has been exacerbated by the withdrawal of key tax credits, particularly under Sections 62 and 62A of the Income Tax Ordinance, 2001. These credits, which provided vital tax relief on investments in mutual funds, approved pension schemes, and life insurance policies, were cornerstones of financial planning and saving for salaried individuals. With their elimination in the Finance Act 2022, tax experts now argue that middle- and upper-middle-income earners are being unfairly squeezed, with fewer avenues to mitigate their tax burden.
Rationalization or Reinstatement of Exemptions
Calling for immediate and decisive reform, ICAP has urged the government to either rationalize the salary tax rates to reflect economic realities or, alternatively, to restore long-forgotten exemptions on essential employment-related benefits. These benefits include allowances for house rent, conveyance, utilities, and house financing. According to experts, these allowances historically served as a crucial buffer against rising living costs, and their reinstatement could provide much-needed financial relief to salaried workers who have seen their purchasing power erode.
Passive Income Treatment Under Scrutiny
Another explosive recommendation from ICAP revolves around the treatment of passive income. The institute firmly believes that passive earnings, such as interest or rental income, should not automatically disqualify an individual from accessing the generally more concessional tax regime designed for salaried income. Experts argue that the receipt of passive income does not fundamentally change a person’s primary status as a salaried taxpayer and, therefore, should not be unfairly penalized under the current tax framework.
“The tax regime must be equitable,” ICAP stressed in its proposals, highlighting the stark contrast between salaried individuals, who are taxed on their full gross income with minimal deductions, and businesspersons, who typically enjoy various deductions before their taxable income is determined. Experts insist that it is high time for a fair, transparent, and morale-boosting approach that treats salaried individuals with the financial dignity and equity they deserve.
In essence, the message from tax experts and professional bodies is clear: the government must cease punishing honest wage earners and instead embark on fundamental reforms to the salary tax system that genuinely reflect current economic realities and foster a more equitable taxation environment. The upcoming federal budget for 2025-26 is eagerly awaited to see if these critical recommendations are adopted.
