Salaried Class Alliance Advocates for Tax Reforms in Pakistan

ISLAMABAD: The Salaried Class Alliance Pakistan is advocating for adjustments to tax brackets, higher exemption limits, the restoration of vital deductions, and a dedicated effort to integrate undocumented sectors into the tax system, with the goal of establishing a fairer tax framework.

In a communication to Finance Minister Senator Muhammad Aurangzeb, the Alliance highlighted the substantial increase in tax revenue from the salaried demographic, escalating from Rs 76 billion in 2019 to a projected Rs 570 billion by 2025.

Acknowledging the government’s initiatives to boost revenue, the Alliance underscored that the salaried individuals have been disproportionately burdened by this surge.

“Those earning salaries are already grappling with stagnant earnings amid significant inflationary pressures, which undermines their capacity to sustain an adequate quality of life,” the letter conveyed.

It further elaborated that the elimination of tax incentives and allowable deductions under the Finance Act, 2022—encompassing investments in equities, mutual funds, Sukuk bonds, life insurance, and health insurance—has amplified the economic strain on salaried taxpayers. The introduction of additional tax escalations via the Finance Act, 2024, which includes a 10% surcharge, has intensified the situation.

“These circumstances have compelled numerous salaried individuals to pursue overseas employment prospects that promise improved career opportunities and living standards,” the Alliance noted. The removal of deduction privileges on earnings from loans provided by scheduled banks and SECP-regulated non-banking financial entities was also cited as diminishing financial relief.

While a 10% medical allowance and corresponding reimbursements are still exempt under Clause 139 of Part I of the Second Schedule of the Income Tax Ordinance, 2001, the Alliance emphasized that this exemption has not kept pace with the prevailing inflation. Furthermore, unlike other taxpayer categories, salaried individuals cannot deduct job-related expenses from their taxable income. The unchanged annual exemption threshold of Rs 600,000 has also been flagged as inadequate given escalating inflation.

The Alliance presented a comparative study of tax structures in comparable economies such as India, Bangladesh, Vietnam, and Nepal, revealing that Pakistan’s system, characterized by lower exemption thresholds and limited deductions, imposes a greater financial obligation on salaried taxpayers, rendering it inherently regressive.

It emphasized that the salaried segment, recognized for its transparency and tax compliance, disproportionately shoulders the burden of tax collection while a considerable segment of the economy operates outside formal documentation.

“The government must prioritize expanding the tax base by incorporating undocumented sectors—including real estate, wholesale operations, and informal businesses—into the formal tax system. This measure will alleviate pressure on compliant taxpayers and foster sustainable revenue augmentation,” the Alliance asserted.

The Alliance has proposed the following recommendations to the Finance Ministry for deliberation during the finalization of the Finance Budget for 2025-2026:

  • Revise Tax Brackets: Adjust tax brackets for salaried individuals to reflect current living costs and international standards, or at a minimum, reinstate pre-Finance Act 2024 tax rates, including the elimination of the 10 percent additional surcharge. This surcharge is viewed as punitive and should not apply to compliant taxpayers.
  • Increase Medical Allowance Exemption: Enhance the medical allowance exemption from 10% to 25% to accurately reflect contemporary healthcare expenditures.
  • Introduce Commuting and Related Allowances: Implement a 15% deductible allowance to address commuting and other essential employment-related costs.
  • Enhance Annual Exempt Threshold: Elevate the current exemption threshold from Rs 600,000 to at least Rs 1,200,000 to account for the erosion of purchasing power due to inflation.

The Alliance has appealed to the Finance Minister and the Federal Board of Revenue (FBR) to address these critical issues in the upcoming federal budget for 2025–2026, expressing optimism that under the Finance Minister’s guidance, significant reforms will be enacted to safeguard the economic stability of salaried individuals while upholding fiscal accountability.