There are reports that in the upcoming budget, the Pakistan Tehreek-i-Insaf (PTI) government is looking to roll-back tax exemptions granted by the Pakistan Muslim League-Nawaz (PML-N) to salaried professionals on their incomes in the tail-end of their tenure in 2018. If this does indeed come to pass, the middle-class might not be too happy with the arrangement, but it must also be realised that the exemptions granted by PML-N were unrealistic and desperately needed a review. Perhaps, from the perspective of the previous government, allowing for relaxation of income taxes before their tenure ended was a means to win a few extra votes, because the idea lacks basic economic sense.

The tax exemptions in question were granted to employees earning Rs 33000-100000 per month, as a result of which they only had to pay a monthly tax of Rs1000 or 2000. An estimated 25 per cent of the country’s population lies somewhere around the middle-class bracket, meaning that they earn somewhere around Rs50000 per household. With many of them being salaried professionals, this move was targeted at this portion of the population.

However, with the wealthiest in the country already dodging taxes and the middle-class made exempt through this relief provided by the PML-N, the biggest burden of the state’s revenue through taxation falls on those that are on the lower end of the earning scale, thereby making the situation worse for those that are poor.

Indirect taxes such as sales taxes are usually regressive in nature, which means that they affect the poor more than they do the rich. Direct taxes, in theory at least, are progressive and hence aimed at taking more money from those that are rich and vice versa. If the state is not taxing 25 per cent of the population while those that can pay the most in taxes find numerous ways to avoid what they owe to the country, then not only is the burden on the poor unfair, but the state loses out on important streams of revenue that can significantly worsen the country’s revenue receipts.

This last exemption granted by the PML-N removed roughly 521597 income tax return filers from the country’s tax base. A 44 per cent decline in income tax revenues from July 2018 to March 2019 compared to the year before tells us that the PTI governments move will be sensible, as long as tax rates from the salary brackets identified remains proportional and progressive. One can only hope that the government can also improve its collection rates from wealthier citizens, because the population as a whole needs to contribute towards improving the country’s economy, not just a select few.