DESPITE the state of the economy, the IMF’s demand that the cash-strapped Shehbaz Sharif administration start taxing civil and military pensions exceeding Rs1.2m a year, as well as revoke income tax exemptions for various pension schemes and funds in the next budget, appears unfair.

It is true that the pension tax and withdrawal of existing income tax exemptions for pension funds and schemes is projected to generate additional tax revenues in the range of Rs22bn to Rs25bn per annum, but the move will add to the financial burdens of a class of citizens with few other sources of income. Besides, withdrawing the tax rebate incentive from pension funds will discourage people from saving for their retirement.

The proposal is reported to be part of the recommendations that the Fund has already put forth for the government to recover additional tax revenues of Rs600bn. It is premised on the principle of a fair tax policy: all incomes must be taxed regardless of source.

Unfortunately, Pakistan’s taxation structure is inequitable and unfair. If the government has no option but to tax pensions, then it has to ensure that the fair tax principle is implemented across the board and that ‘special exemptions’ being enjoyed by judges, military personnel and others are stopped. Moreover, the tax must be applied progressively. The suggested threshold of Rs1.2m for taxable pension incomes would create a distortion in the existing income tax scheme, where all personal incomes above Rs600,000 per annum are liable to pay income tax. This anomaly can be removed by doubling the threshold of taxable income for all individuals to bring it at par with the one proposed for pensioners. That would mitigate the burden on the inflation-stricken classes.

Tax reforms must go beyond milking the salaried classes and pensioners, who are easy FBR targets. In spite of multiple tax reform programmes implemented over the last three decades with financial assistance from multilateral lenders, the authorities have failed to achieve their objectives, including raising the tax-to-GDP ratio and bringing it closer to the level of lower-middle-income countries at 15pc to 20pc. The previous 39-month IMF programme had also envisaged boosting tax revenues by 4-5pc of GDP by reforming personal and corporate income taxes.

Yet Pakistan’s tax collection as a ratio of GDP remains below 10pc. Tax reforms have failed to deliver because of distortions created by the FBR bureaucracy through SROs, apparently for personal gains. With the size of tax expenditure at Rs2.5tr at the end of FY23, it is clear that some people are being forced to pay more tax than what they should be in an equitable tax system, while favoured circles enjoy exemptions.

Unless these distortions are removed by implementing fair taxation measures, it will be difficult to increase the tax-to-GDP ratio. Last but not least, the power to levy a tax or allow exemptions should be restored to parliament by eliminating the SRO culture in FBR.

Published in Dawn, May 11th, 2024