ISLAMABAD: Prime Minister Shehbaz Sharif has granted in-principle approval to a significant proposal for income tax relief targeted at the salaried class, marking a potential easing of fiscal pressure on formal sector workers in Pakistan. The plan, reported by ARY News citing reliable sources, includes reducing the maximum income tax rate by five percentage points to 30 percent for high earners, alongside the elimination of the super tax on wealthy individuals and the corporate sector.
The proposals emerged from a high-level meeting chaired by the prime minister, where officials reviewed options to provide targeted relief amid ongoing economic recovery efforts. Sources indicate that the government intends to present these measures to the International Monetary Fund next week for necessary endorsement, ensuring alignment with fiscal discipline requirements under the current program.
At present, the top marginal income tax rate for salaried individuals stands at 35 percent on taxable income exceeding Rs4.1 million annually, as per the slabs introduced in the Finance Act 2025. A reduction to 30 percent would directly benefit upper-tier earners, potentially increasing their disposable income and encouraging higher compliance in the formal economy.
The super tax, an additional levy imposed on high-income individuals and companies exceeding certain thresholds, has been a point of contention since its introduction. Abolishing it would remove an extra burden on affluent salaried persons and businesses, though the exact threshold for application remains tied to annual earnings above Rs10 million in many cases, where a surcharge of nine percent currently applies.
Government estimates suggest the overall tax relief package could amount to Rs1.5 to 1.8 trillion, a figure that reflects ambitious concessions across sectors. However, officials acknowledge the IMF’s likely caution regarding such a large fiscal space concession, given Pakistan’s need to maintain revenue momentum and meet program targets.
The prime minister has directed relevant authorities to refine these proposals further, incorporating insights from private sector experts to strengthen their case during IMF negotiations. This consultative approach aims to balance domestic demands for relief with international obligations for sustainable public finances.
Salaried taxpayers form a critical segment of Pakistan’s tax base, contributing substantially to direct revenue despite representing a smaller portion of the workforce compared to informal sectors. Recent data from the Federal Board of Revenue shows that salaried individuals paid over Rs391 billion in income tax during nine months of a prior fiscal year, underscoring their consistent role in national collections.
The current income tax structure for salaried persons, effective from the 2025-26 fiscal adjustments, features a zero rate up to Rs600,000 annually, followed by progressive slabs. For instance, income between Rs600,001 and Rs1.2 million attracts one percent on the excess, while higher brackets apply rates up to 35 percent with fixed components and surcharges.
Previous budget measures in 2025-26 already delivered notable reductions for lower and middle brackets, slashing rates from five percent to one percent in the Rs600,001 to Rs1.2 million slab and from 15 percent to 11 percent in the next tier. These changes provided monthly savings ranging from Rs500 to several thousand rupees depending on income levels.
The latest proposal extends this momentum upward, focusing on the highest slab to address grievances from professionals earning substantial salaries. Sources emphasize that any final implementation would prioritize documented salaried earners, distinguishing them from non-filers or informal income sources.
Economists view such targeted relief as a tool to boost consumption and economic activity, particularly in urban centers where salaried employment predominates. Increased disposable income could stimulate demand in retail, housing, and services sectors, supporting broader growth objectives.
However, challenges persist in expanding the tax net, with Pakistan’s tax-to-GDP ratio hovering around 10-11 percent in recent years. The government faces pressure to widen the base rather than deepen cuts, making IMF consultations crucial to avoid revenue shortfalls.
Representatives from salaried groups have long advocated for more substantial measures, including higher exemption thresholds and broader rate reductions. While welcoming the current initiative, they note that full realization depends on successful IMF engagement.
The proposals reflect the government’s intent to foster equity in taxation while navigating external constraints. If approved, the changes could take effect in upcoming fiscal adjustments or through mid-year amendments, providing timely relief amid persistent inflationary pressures.
Overall, this development signals a proactive stance toward alleviating the tax burden on compliant salaried citizens, contingent on securing multilateral support for fiscal sustainability.