The proposed national budget is poised to significantly impact middle-class household budgets. Pakistan’s middle class has already been shrinking over the past few years. Historic high inflation, which peaked at 48 per cent at one point in the past year, coupled with stagnant incomes due to a sluggish economy, has pushed families further down the social scale.

In the absence of a clear definition of the middle class in the country, an attempt was made here to identify it considering the expected living standards. Based on reasonable estimates, individuals supporting their families on a monthly income ranging from approximately Rs125,000 to Rs350,000 are considered middle class. The majority — around 70pc — earn about Rs150,000 per month. Tax burden for this group has been increased, with proposed rates ranging from 15-30pc.

The upward revision of income tax rates across all five income tax slabs will impact everyone in the tax net, but it will burden the salaried class the most since they tend to be captive tax payers as their tax liability is deducted at source. Additionally, the income slabs could have been consolidated and the limits revised to make the framework more realistic and progressive.

“Considering the cost of living for a family, the exemption limit should have been doubled. A basic home-cooked meal (bread with gravy) for an average family of seven costs at least Rs500, adding up to a monthly kitchen expenditure of Rs42,000 when including tea, milk, and sugar. Therefore, a monthly income of Rs120,000 should be the cut-off for taxation,” said an analyst. Economist Dr Rashid Amjad suggested a Rs900,000 annual income cut-off limit for taxation in his reaction to the budget.

The government dashed middle-class household hopes by increasing income tax even as declining inflation offered some relief

“There was discussion at one point about lowering the taxation threshold to an annual income of Rs500,000 from the current Rs600,000. Can the government justify forcing people who earn barely enough to feed their families to contribute to the state budget? It is truly heartless for the rulers to make a salaried person living below the poverty line pay income tax as well,” commented a senior source in an economic ministry.

It is pertinent to note that applying the $2.1 per person per day standard to determine the poverty line for an average Pakistani seven-member family shows, using simple arithmetic, that a monthly income of Rs122,000 places it at the poverty line given the current exchange rate.

According to the new income tax slabs, citizens earning between Rs50,000 to Rs100,000 monthly will be liable to pay Rs2,500 to Rs5,000 every month as income tax. Those earning between Rs100,000 to Rs180,000 will pay Rs7,000-27,000 each month. Earners with gross incomes from Rs180,000 to Rs260,000 will pay between Rs45,000 to Rs60,000, and those with incomes from Rs260,000 to 340,000 will be taxed at the rate of 30pc, amounting to about one-third of their monthly income. The maximum tax rate is set at 35pc for those who earn more than this.

Given the country’s economic challenges, no one expected miracles from the budget. However, relative stability and declining inflation had rekindled some hope. Sadly, the budget dashed these hopes, exposing structural flaws and proving that trust in the government’s supposedly people-friendly economic strategy was misplaced.

The federal budget seems to cater to specific interests rather than the majority. It could have utilised available resources more judiciously and distributed the taxation burden more equitably. The International Monetary Fund (IMF), focused mainly on maintaining fiscal discipline and adhering to advised deficit limits, likely wouldn’t have objected to such an approach.

While there was little manoeuvrability on the expenditure side — the government could have saved precious little by chopping unproductive public spending — this could have been achieved by right-sizing the oversized bureaucracy and prioritising limited need-based schemes under the Public Sector Development Programme (PSDP). Instead, it chose to be generous with public funds, using them to please legislators on treasury benches and powerful patrons.

The situation becomes even more concerning when assessing the incidence of tax burden from the proposed measures. Efforts to broaden the tax base by targeting under-taxed sectors like real estate and trade were weak, and agriculture was inexplicably left untouched. The resource gap is once again set to be filled through inherently regressive indirect taxes, such as the petroleum development levy and increased sales tax rates.

The ratio of direct to indirect taxes, a crucial indicator of the taxation framework’s nature, is set to worsen in a country where about half the population lives below the globally accepted poverty line of $2.15 per day and where income and wealth inequality are stark.

Systematic data on poverty and inequality remains unknown in Pakistan, as the official report on the state of the economy, the Pakistan Economic Survey, fails to address these issues, probably to avoid embarrassing the government.

The changes in the income tax regime to make it universal, taxing incomes regardless of their source, are commendable. However, given the rampant culture of tax evasion and the preference for cash transactions by service providers, the role of the tax-collecting agency becomes critical. The Federal Board of Revenue has a less than stellar track record in this regard, making the realisation of targets uncertain.

“When the state fails to fulfil its basic responsibilities, it loses the moral authority to demand that citizens meet their tax obligations honestly. When I pay for security and arrange basic services privately while watching the government waste public funds, I prefer to fulfil my social responsibility directly by helping the needy rather than paying more taxes on top of what is already indirectly extracted.

“I am not condoning tax evasion, but emphasising that the government must improve governance and service delivery before expecting tax compliance from the public,” an economist argued.

“I think the government has understated earnings of the top two brackets who constitute the elite class in the country. Only an objective study of their spending profiles can project the ranges of income of the two top brackets, as it would be naive to expect this class to volunteer this sensitive information — for obvious reasons.”

Published in Dawn, The Business and Finance Weekly, June 17th, 2024