Govt plans modest tax relief for salaried class in upcoming budget

• FBR will need to introduce compensatory tax measures to offset the revenue gap created by tax relief for salaried individuals

The federal government is set to propose a slight reduction in tax rates for the salaried class in the upcoming budget for the 2025-26 fiscal year. 

Under directives from Prime Minister Shehbaz Sharif, the government aims to ease the tax burden on individuals earning regular salaries by lowering tax rates by 1 to 1.5 percentage points, Dawn reported, citing sources. 

The adjustment, while modest, signals the government’s intention to begin addressing the concerns of the salaried class, who have long faced higher tax rates.

According to the Salaried Class Alliance of Pakistan (SCAP), the contribution of salaried individuals to Pakistan’s tax revenue in the 2024-25 fiscal year is expected to be five times higher than that of exporters and retailers. The FBR collected Rs430 billion in income tax from salaried individuals during the first ten months of the fiscal year 2024-25. 

In a pre-budget meeting held last week, Finance Minister Muhammad Aurangzeb stated that the government plans to shift the tax burden away from the salaried class and the documented sector. This shift will involve encouraging greater use of digital payments, as part of an ongoing effort to transition the economy towards a cashless system. 

Aurangzeb suggested that the upcoming budget would introduce measures to promote digital transactions, which would help increase documented business activities and reduce the reliance on cash.

During a public address later that week, the finance minister further emphasized that the forthcoming budget would introduce “bold measures” aimed at steering Pakistan’s economy in a more strategic direction. These measures are expected to include steps that not only ease the tax burden but also push for greater financial inclusion through digital solutions.

According to a report by The News, Pakistan is nearing an agreement with the International Monetary Fund (IMF) on tax relief for the salaried class, although meeting the ambitious revenue target of Rs14.2 trillion will remain a challenge. 

The IMF’s approval could provide a relief of Rs56-60 billion for salaried individuals in the next fiscal year. However, to balance the revenue gap caused by these cuts, the FBR will need to introduce compensatory tax measures. 

The FBR had proposed a 1% tax rate for the first income slab, covering earnings from Rs0.6 million to Rs1.2 million annually, down from the current 5%. If approved, this change would reduce tax liability for individuals earning up to Rs100,000 per month from Rs30,000 to Rs6,000. 

The IMF has suggested a slightly higher 1.5% tax for this slab, amounting to Rs9,000 in tax for the same earnings.

For the higher income slabs, a 2.5% reduction is proposed across all levels, with the highest tax rate dropping from 35% to 32.5%. However, discussions are still ongoing to finalize the exact figures.