The IMF asked the government to generate additional tax revenues of Rs600bn, and start taxing pensions

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Hyderabad: 11 May 2024: Even though the economy is struggling, the IMF's demand for the financially tight Shehbaz Sharif administration to start taxing civil and military pensions exceeding Rs1.2m a year, and to remove income tax exemptions for various pension schemes and funds in the next budget, seems unfair.

While it's true that the pension tax and removal of income tax exemptions for pension funds and schemes are expected to bring in additional tax revenues of Rs22bn to Rs25bn per year, it will put more financial strain on a group of people who have limited income sources. Additionally, taking away tax incentives from pension funds may discourage people from saving for retirement.

This proposal is part of the recommendations made by the IMF for the government to generate additional tax revenues of Rs600bn. It aims for a fair tax policy where all incomes are taxed regardless of their source.

Unfortunately, Pakistan's tax system is unjust. If the government must tax pensions, it should ensure that all incomes, including those of judges, military personnel, and others, are taxed equally. Moreover, the tax should be applied progressively. The suggested threshold of Rs1.2m for taxable pension incomes would disrupt the existing income tax system, where all personal incomes above Rs600,000 per year are subject to income tax. This inconsistency can be corrected by doubling the threshold of taxable income for all individuals, easing the burden on those affected by inflation.

Tax reforms should not solely target salary earners and pensioners, who are easy targets for the FBR. Despite numerous tax reform programs over the past three decades, Pakistan has failed to meet its objectives, including increasing the tax-to-GDP ratio to 15-20%. The previous IMF program aimed to boost tax revenues by 4-5% of GDP through income tax reforms.

Yet Pakistan's tax collection remains below 10% of GDP. Tax reforms have been ineffective due to distortions created by the FBR bureaucracy through SROs, seemingly for personal gain. With tax expenditure reaching Rs2.5tr by the end of FY23, some are paying more tax than they should in a fair system, while others enjoy exemptions.

To increase the tax-to-GDP ratio, these distortions must be addressed through fair taxation measures. Finally, the power to levy taxes or grant exemptions should be returned to parliament by ending the SRO culture in the FBR.

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