The Debate Over Taxing Pensions in Pakistan
The International Monetary Fund (IMF) has proposed taxing high-value pensions (above Rs. 1.2 million annually) and removing tax exemptions for pension funds in Pakistan’s upcoming budget. This proposal has sparked debate, with some questioning its fairness and effectiveness.
Arguments Against Taxing Pensions:
- Burden on Retirees: Critics argue it unfairly burdens a class with limited income sources.
- Discourages Retirement Savings: Removing tax breaks for pension funds could discourage saving for retirement.
Arguments for Taxing Pensions:
- Increased Revenue: The IMF estimates additional tax revenue of Rs. 22-25 billion annually.
- Fairness Principle: All income, regardless of source, should be taxed (in theory).
Seeking a Fairer System:
There are alternative solutions:
- Equalize Tax Thresholds: Increase the taxable income threshold for everyone (not just pensioners) to Rs. 1.2 million, aligning it with the proposed pension tax threshold.
- Broaden Tax Base: Tax reforms should go beyond salaried individuals and pensioners.
- Address FBR Inefficiencies: Eliminate distortions caused by Statutory Regulatory Orders (SROs) issued by the FBR, potentially for personal gain.
- Reduce Tax Expenditures: Review the Rs. 2.5 trillion in tax expenditures to ensure a more equitable system.
- Parliamentary Oversight: Restore Parliament’s power to levy taxes and grant exemptions, reducing reliance on SROs.
The Path Forward:
The time is to implement a comprehensive tax reform strategy that goes beyond one-off measures like taxing pensions. Only by addressing underlying issues like SROs and unfair exemptions can Pakistan achieve a sustainable and equitable tax system.
