The Salaried Class Alliance Pakistan is urging the government to implement significant changes to the income tax system in the upcoming fiscal year 2025-2026 budget. Their demands include a revision of existing tax slabs, a substantial increase in the tax exemption limit, the reinstatement of previously available tax deductions, and a stronger government focus on bringing currently untaxed sectors into the formal tax system.
Growing Tax Burden on Salaried Individuals
In a formal communication to Finance Minister Senator Muhammad Aurangzeb, the Alliance highlighted the significant growth in tax revenue collected from the salaried class, which has risen from Rs 76 billion in 2019 to an anticipated Rs 570 billion in 2025. While acknowledging the government’s success in revenue generation, the Alliance argues that this increase has disproportionately burdened salaried individuals.
Impact of Inflation and Removed Deductions
The letter emphasizes the financial strain faced by salaried workers due to stagnant wages coupled with high inflation, making it difficult to maintain a reasonable living standard. The Alliance further points out that the removal of various tax credits and deductible allowances in recent years, specifically mentioning the Finance Act of 2022 which eliminated deductions for investments in shares, mutual funds, Sukuk, life insurance, and health insurance, has exacerbated the situation. Subsequent tax hikes, including a 10% additional surcharge introduced in the Finance Act 2024, have further compounded these challenges.
Concerns Over Talent Migration
The Alliance expressed concern that this increasing financial pressure is leading many skilled professionals within the salaried class to seek better employment opportunities and living standards abroad. They also noted the elimination of deductible allowances on profits from loans as another factor reducing financial relief for this segment.
Disparities in Tax Treatment
While acknowledging the existing 10% medical allowance exemption, the Alliance argues that this limit has not kept pace with rising healthcare costs. They also highlighted the disparity in tax treatment compared to other taxpayer categories, as salaried individuals are not permitted to deduct employment-related expenses. Furthermore, the annual tax exemption threshold of Rs 600,000 has remained unchanged for several years despite significant inflation.
Pakistan’s Tax System Compared to Peer Economies
The Salaried Class Alliance presented a comparative analysis of tax systems in countries like India, Bangladesh, Vietnam, and Nepal, suggesting that Pakistan’s current system places a comparatively heavier and more regressive burden on salaried taxpayers due to lower exemption limits and fewer available deductions.
Call for Widening the Tax Base
The Alliance stressed that the salaried class remains the most transparent and compliant segment of taxpayers, yet they continue to bear the brunt of tax collection while a significant portion of the national economy operates outside the tax net. They urged the government to intensify efforts to broaden the tax base by bringing undocumented sectors such as real estate, wholesale trade, and informal businesses into the formal taxation framework. This, they argue, would not only alleviate the burden on compliant taxpayers but also support sustainable revenue growth for the country.
Key Recommendations for FY26 Budget
In their recommendations submitted to the Finance Ministry for consideration in the upcoming budget, the Salaried Class Alliance proposed the following key changes:
- Revise Tax Slabs: Adjust tax brackets to reflect the current cost of living and align with international best practices, or at least revert to the tax rates in place before the Finance Act 2024, including the removal of the 10% surcharge.
- Increase Medical Allowance Exemption: Raise the medical allowance exemption limit from the current 10% to 25% to better reflect current healthcare expenses.
- Introduce Commuting and Related Allowances: Allow a 15% deductible allowance to cover commuting and other necessary employment-related expenses.
- Enhance Annual Exempt Threshold: Increase the current tax exemption limit from Rs 600,000 to at least Rs 1,200,000 to account for the significant erosion of purchasing power due to inflation.
Hope for Meaningful Reforms
The Alliance has called upon the Finance Minister and the Federal Board of Revenue (FBR) to seriously consider these pressing issues when finalizing the federal budget for 2025-2026. They expressed optimism that under the Finance Minister’s leadership, meaningful reforms will be introduced to safeguard the financial well-being of the salaried class while also ensuring fiscal responsibility for the nation.
