The untagged shoulders of the economy

Taxation is based on the reciprocal duties of protection and support between the state and its people. The paramount objective of taxation is to provide funds to promote the general welfare and protection of its citizens and to enable it to finance its multifarious activities. Taxation should be administered in a manner that is fair to all parties involved. Direct taxes typically have a more pronounced effect on reducing inequality compared to indirect taxes. The latter often exacerbate inequality as they are levied universally, even on those with limited means.
A substantial segment of economic operations takes place within the informal sector, posing challenges for taxation. Consequently, the tax burden disproportionately impacts formal sector employees. However, this objective appears irrelevant when examining the private salaried class (white-collar workers), who constitute the major contributors to the Withholding Tax collection system yet are consistently overlooked.
The Federal Board of Revenue (FBR) holds the principal responsibility for overseeing the nationwide collection of Federal Tax Revenues. The generation of tax revenue is intricately tied to economic performance, with vibrant economic activities presenting opportunities for increased tax collection. The FBR’s duties include gathering federal taxes, which are categorized into Direct taxes and Indirect Taxes. Direct taxes consist of Income Tax, Capital Value Tax, Workers’ Welfare Fund, and Workers’ Profit Participation Fund, while Indirect Taxes encompass Sales Tax, Customs Duty, and Federal Excise Duty.
Federal taxes are collected domestically as well as at import stages, whereas customs duties are predominantly collected upon imports. Our focus lies on Direct Taxes in general and taxes collected from the salaried class in particular.
Direct Taxes serve as the primary revenue source for Federal Taxes, contributing 45.6% to the overall collection. In the fiscal year 2022-23, net collection from Direct Taxes exceeded Rs. 3 trillion (Rs. 3,271 billion, precisely), marking a significant growth of 43.1% compared to the previous year. Direct Taxes comprise two primary components: (i) Income Tax, which constitutes the majority share of 98.2% in total Direct Taxes, and (ii) Other Direct Taxes. The collection of Income Tax includes payments made through demand, voluntary contributions, and withholding taxes.
The fact that Withholding Taxes contribute around 62% of the total gross collection of Income Tax warrants a closer examination of its components. Taxes collected from salaries fall under this category, along with nine other components. However, Contracts, Bank Interest & Securities, and Imports are considered major components of Withholding Tax, with their respective shares of 23.4%, 17.4%, and 16%. Withholding Tax collection from salaries ranks as the fourth-largest component of the Withholding Tax, amounting to Rs. 276,062 billion, representing a 40.7% growth in collection due to a 15.2% increase in salary shares during FY 2022-23.
According to the Labour Force Survey (2020-2021), a total of 67.25 million individuals are employed in Pakistan, with 37.4% (25.18 million) in the Agriculture sector and 62.6% (42.07 million) in the non-agriculture sector. The non-agriculture sector is further divided into formal and informal sectors, contributing 17.2% (11.58 million) and 45.3% (30.49 million) to the labour force, respectively.
Ironically, in Pakistan, no industry other than Mining & Quarrying has an average annual income for self-employed individuals exceeding Rs. 600,000, the minimum tax benchmark. According to the Labour Force Survey (2020-2021), the average annual income for a self-employed worker in Mining & Quarrying is Rs. 860,993, leaving rest of the workers/employees well behind the tax benchmark. This raises the question,
“Who are the individuals paying TAX, and why are they not being considered?”
These individuals are the true shoulders of the nation, bearing the responsibility of contributing a substantial portion of their income, whether working in the public or private sectors.
Now employees working for the government ultimately receive rewards during and at the end of their service, including hiring benefits, pension, health coverage, reimbursement, car loans (with 0% markup), house-building finance (0% markup), child marriage allowances, and more. Conversely, those working in the formal private sector (salaried class) are blindly ignored and left untagged completely, despite paying significant amounts in taxes to alleviate the burdens placed on their shoulders. They receive a token of fractional incentive, with many unaware of programs like EOBI and even how to register for them.
Additionally, the informal sector remains largely untaxed due to its elusive nature, further exacerbating the disparity in tax burden. Individuals earning substantial incomes and paying significant taxes rightfully expect quality public services and incentives in return, as observed in both developed and developing economies. However, in Pakistan, the benefits derived from high taxation are often negligible.
This disillusionment deepens when members of the salaried class working in private sector witness traders, retailers and government employees within their social circles enjoying better lifestyles while contributing in direct taxes.In response to these disparities, marginal taxpayers may opt to join the informal sector, seek opportunities abroad, or may lose faith in the taxation system altogether.
Lastly, the employees (salaried class) working in the private sector contribute billions to tax collection net and should be treated likewise to their government counterparts if the principle of tax deduction is to be upheld. However, this aspect is often overlooked by both sides. The government displays no interest in providing incentives comparable to those offered to government employees, while private sector employees seldom advocate for their legitimate rights. Government and the policy makers must bridge this widening gap between public and private sector employees in terms of benefits and incentives, ensuring those in the private sector to feel more secured and valued for their vital role in the economy.