Pakistan’s salaried group is rightly anxious ahead of the budget

Saad (name protected), a salaried person working at a private company, contemplated sharing his salary with his spouse – a stay-at-home individual – to reduce tax liability. Another salaried individual negotiated for perks and benefits, turning down a higher gross salary to save a few thousand rupees.

Now, Saad* – who made Rs350,000 (roughly $1,250) a month and nearly 10 times Pakistan’s GDP per capita – could very well pay Rs46,250 as the tax liability the government charges at this salary.

Instead, he wanted payroll to add his wife as an employee, pay her Rs150,000 and cut Rs7,500 as the income tax liable at this level.

His own income would have come down to Rs200,000, but a tax liability of just Rs13,750 made the proposal attractive.

Net effect: the couple would have still made Rs350,000, but with a tax liability of Rs21,250 instead of Rs46,250 on just Saad would have resulted in ‘savings of Rs25,000’.

Note: the savings amount becomes higher as incomes rise

There was an ethical consideration: Saad did not want to save money this way. But an average inflation figure of 25-30% and growing disbelief that tax contributions would not be utilised for Pakistan’s betterment meant the proposal was seriously considered.

He did not opt for it at the end. Career prospects, and salary negotiations with another employer became reasons. But at the end, his simple argument was: the taxes are for Pakistan, and ‘I owe them to the nation’.

Another private sector employee had a different take on the issue. Their employer was more than willing to pay a part of the salary in cash. Operating in a sector where such transactions are the norm, the employer negotiated a slightly lower raise, offered a part of the salary in cash, and it resulted in savings for both – itself and the employee.

Net effect: Pakistan state lost out on some tax revenue, but the employer and employee came out as winners.

These methods to save on tax liabilities are not new or hidden from the tax machinery. In fact, efforts were made by almost every salaried person earning above a certain threshold to actively look for ways to reduce tax liability.

Islamabad, over the years, has increased taxes on salary to the extent that when reports started to make the rounds that an effective tax rate of 45% will be applicable on ‘incremental income’ over Rs500,000, there wasn’t disbelief. There was a sense of anger, and disappointment.

The graph shows how much the salaried group’s contribution to revenue has increased over the years. Its self-explanatory, and shows a seven-times increase over 11 years. The increase over the last four years has been especially profound.

This year, it has been reported already that salaried group contributed around Rs330 billion in 11 months. This amount is projected to stand at Rs360 billion over the entire fiscal year, a phenomenal 36% increase during a year when inflation stood at an average of 24.5% in 11 months of the outgoing fiscal year.

Salaried people argue that any avenue to save has been lost, and incomes/output are barely keeping pace with rising costs. A short survey conveyed that petrol and energy bills of a certain household take away 15-25% of their incomes. With a substantial portion going towards taxation, there is very little room left.

This group also debates the merits of high taxation. Some questions include: what do we get in return?

From education to transport, arrangements are mostly private. Health and insurance cover are also from the private sector along with water.

On a WhatsApp group operated by some salaried individuals, there was talk of leaving Pakistan.

In my opinion, they do not want to leave Pakistan. They want to leave the system that seemingly only taxes people who already contribute. They want to quit what they see as an unjust system that offers nothing in return.

Reliance on state machinery for protection and security had reduced a long time ago. Measures to be safe were taken on their own. Still, muggings and snatchings are everyday occurrences.

Maybe the second private sector employee mentioned in the article had a point. What is the use of paying the taxes? Maybe if the government initiated austerity on its own end, the public wouldn’t mind contributing its fair share.

For now, it seems like the salaried group will have anxious pre-budget jitters.

If the government does decide to increase taxes on salaried incomes, remember that it used it as a source of ‘easy revenue’.

The article does not necessarily reflect the opinion of Business Recorder or its owners