IMF Agrees to Income Tax Cuts for Pakistan’s Salaried Class in 2025–26 Budget

In a significant breakthrough during the ongoing budget negotiations between Pakistan and the International Monetary Fund (IMF), Islamabad has secured a commitment from the Fund to provide relief to the salaried class in the upcoming fiscal year 2025-26. According to sources cited by ARY News, the IMF has agreed to reduce income tax rates across all salary slabs, marking a notable shift from earlier discussions where the Fund had pushed for revenue-enhancing measures targeting this segment. Under the proposed amendments to Section 129 of the Income Tax Ordinance, the tax-free annual income threshold would be raised from Rs 600,000 to Rs 1 million, effectively rendering monthly salaries up to Rs 83,000 exempt—a substantial increase from the existing Rs 50,000 exemption limit (samaa.tv). Furthermore, planned revisions could halve the tax rate on a Rs 100,000 monthly salary from 5% to 2.5% and reduce higher‐slab rates by approximately 2.5 percentage points, subject to final IMF approval (en.dailypakistan.com.pk).

Background: Pakistan’s IMF Programme and Fiscal Constraints

Since 2019, Pakistan has been under successive IMF programmes aiming to restore macroeconomic stability, contain ballooning fiscal deficits, and revitalise sluggish economic growth. The latest agreement, negotiated in late 2023, envisages an Extended Fund Facility (EFF) of approximately US $3 billion over 39 months, conditional on stringent fiscal consolidation and structural reforms. Key objectives include reducing the fiscal deficit to 5.2% of GDP by June 2025, broadening the tax base, and enhancing state revenues to service a rapidly mounting debt burden—public debt stood at 82% of GDP by March 2025.

Given these constraints, previous IMF missions had proposed rationalising tax concessions and special allowances—especially those available to salaried and non-salaried individuals—to close revenue gaps. Recommendations included withdrawing tax credits on housing loans, education expense allowances, and workers’ welfare fund (WWF) contributions, potentially extracting an additional Rs 650 billion from individual taxpayers in 2024-25 (tribune.com.pk). However, successive protests from middle-income groups and political bargaining led to a more nuanced stance, with the IMF agreeing to some concessions in exchange for Pakistan’s commitment to maintain overall revenue targets.

Finance Minister Muhammad Aurangzeb has repeatedly emphasised the delicate balancing act: “We understand the IMF’s concerns about revenue mobilisation, but it is equally crucial to protect the salaried class from excessive tax burdens, especially amid rising inflation and cost-of-living pressures.”. With average consumer inflation hovering around 15% year-on-year in early 2025, and the Pakistani rupee trading at roughly Rs 286 per US dollar, household budgets have come under severe strain, heightening public demand for tangible relief.

Key Proposals: Raising the Tax-Free Threshold and Revising Tax Slabs

1. Tax-Free Income Threshold

Under current law, any Pakistani earning above Rs 600,000 per annum (i.e., Rs 50,000 per month) is liable to income tax. The IMF-backed proposal would elevate this threshold to Rs 1 million per annum (i.e., Rs 83,000 per month), effectively exempting the vast majority of lower-middle-income earners. Considering that, according to Federal Board of Revenue (FBR) data, over 75% of salaried taxpayers currently fall below Rs 1 million annual income, this change could spare hundreds of thousands of households from paying any income tax for the first time

2. Reduced Rates Across Salary Slabs

To compensate for revenue foregone by raising the exemption limit, the draft amendments propose lower rates for all remaining tax slabs:

• Rs 83,001–Rs 100,000 (monthly): Rate reduced from 5% to 2.5%.
  
• Rs 100,001–Rs 183,000 (monthly): Rate decreased from 15% to 12.5%.
  
• Rs 183,001–Rs 267,000 (monthly): Rate trimmed from 25% to 22.5%.
  
• Rs 267,001–Rs 333,000 (monthly): Rate lowered from 30% to 27.5%.
  
• Above Rs 333,000 (monthly): Maximum rate eased from 35% to 32.5% 

These adjustments ensure that even higher-earning professionals—such as middle-management executives and senior civil servants—enjoy a moderate reduction, albeit less dramatic than the relief for lower income brackets.

3. Simplified Filing and Compliance

Ahead of the formal budget announcement, FBR officials have hinted at measures to simplify return filing for salaried employees, including:

• Pre-Filled Tax Returns: Issued on the basis of data already available to the FBR (e.g., salary and allowance details), reducing paperwork and errors.
  
• One-Click e-Filing: A streamlined online portal enabling employees to declare minor deductions (e.g., medical or charitable donations) without complicated schedules.
  
• Penalty Amnesty: Limited time window for waiver of late-filing penalties for first-time offenders, provided returns are filed by December 31, 2025 

Although details remain subject to IMF clearance, these procedural enhancements aim to improve tax compliance among the salaried class, historically one of the most compliant segments but often frustrated by bureaucratic hurdles and outdated digital infrastructure.

Concession on Defence Spending

In another key development, Islamabad has successfully argued for the necessity of maintaining robust defence allocations. According to negotiations reported by ARY News, the government stressed that postponing or sharply reducing defence outlays could jeopardise national security and undermine Pakistan’s ability to address strategic challenges along its western and eastern borders.

Sources close to the talks disclosed that the IMF reviewed Pakistan’s defence spending—currently budgeted at Rs 2.1 trillion (roughly 3% of GDP for FY 2024-25)—and has agreed to allow “necessary increases” in the defence budget for FY 2025-26, subject to maintaining overall fiscal targets . This concession signifies a recognition by the IMF that Pakistan’s external security environment necessitates certain baseline levels of military expenditure, even as the Fund pushes for tighter public finances.

Fiscal Implications: Balancing Relief and Revenue Targets

Projected Revenue Impact

Rais al-Haq, an economist at Karachi’s Applied Economics Research Centre, estimates that raising the exemption limit to Rs 1 million could potentially cost the exchequer around Rs 200–250 billion in foregone revenue annually. Adjusting tax slabs downward an additional 2.5 percentage points may further reduce collections by another Rs 100 billion, bringing the total fiscal cost of the relief package to roughly Rs 350 billion, or 0.4% of GDP (english.aaj.tv).

To offset this, Pakistan will need to:

1. Enhance Tax Collection Efficiency
   Crack down on non-filers and widen the tax base by bringing informal sector incomes into the system. The IMF insists on greater enforcement—higher penalties for non-compliance, removal of arbitrary tax waivers, and regular audits of high-income individuals.
   
2. Rationalise Other Expenditures
   Limit provincial development spending, freeze non-developmental current expenditure growth at 5%, and curb discretionary purchases by ministries.
   
3. Explore New Revenue Streams
   Consider modest hikes in excise duties, surcharges on luxury goods, and measures to curtail import duty exemptions that cost the treasury more than Rs 200 billion annually.
   

Despite these measures, Islamabad’s ability to achieve the Rs 12.9 trillion ($45 billion) tax-collection target in FY 2025-26 remains in question, given persisting structural challenges and sluggish GDP growth of 2.4% in Q1 2025. “Without aggressive tax reforms and digitisation, fulfilling revenue targets while granting significant relief to the salaried class will be an uphill battle,” warns Dr Asad Sattar, a fiscal policy expert at LUMS.

Economic Context: Cost of Living, Inflation, and Currency Pressures

Inflationary Pressures

Consumer inflation in Pakistan accelerated to 15.3% in April 2025, driven by rising food and energy costs. A devaluation of the rupee to nearly Rs 286 per US dollar in early 2025 has increased import bills for essential commodities, from diesel to soybean oil, compounding the burden on households. In such an environment, income tax relief can provide much-needed breathing space to middle-class families struggling with shrinking purchasing power.

Exchange Rate Volatility and External Debt

Pakistan’s external debt servicing obligations have ballooned to Rs 9.8 trillion for FY 2025-26, with Rs 1.15 trillion earmarked for external interest payments alone. A depreciating currency makes this burden even heavier. The IMF’s willingness to sanction tax relief reflects a pragmatic approach: by easing fiscal pressure on the salaried class, consumer demand may recover marginally, supporting GDP growth and, in turn, improving revenue prospects in the medium term.

The Remittance Factor

Overseas Pakistanis remitted a record US $30 billion in 2024, shoring up foreign exchange reserves and cushioning the current account deficit. Anecdotal evidence suggests that families receiving remittances have already begun budgeting for tax relief, anticipating more disposable income in the months ahead. However, heavy reliance on remittances remains a double-edged sword—while it provides short-term stability, it underscores the lack of diversified export growth and domestic industrial expansion.

Stakeholder Reactions

Government and Finance Ministry

Both Finance Minister Muhammad Aurangzeb and Federal Board of Revenue (FBR) Chairman Abid Hussain have publicly welcomed the IMF’s concession on the salaried tax relief, describing it as a “balanced compromise” that protects vulnerable households without jeopardising macroeconomic stability. In a televised interview, Aurangzeb stated:

Opposition Parties

The main opposition, Pakistan Peoples Party (PPP) and Pakistan Tehreek-e-Insaf (PTI), have cautiously praised the relief measures but warned that without job creation and structural reforms, tax breaks alone will not resolve economic malaise. PPP’s finance spokesperson Shazia Marri remarked:

PTI leaders, while critical of any IMF intervention, have said that “any relief for ordinary Pakistanis is positive,” provided the process remains transparent and that concessions for defence spending do not come at the expense of public welfare programmes.

Business Community and Chambers of Commerce

The Federation of Pakistan Chambers of Commerce and Industry (FPCCI) has hailed the move as “constructive,” noting that reduced tax rates could marginally boost corporate earnings and consumer confidence. FPCCI President Mian Nasser Hyatt commented:

However, some exporters have expressed concern that cutting personal income tax without parallel measures to incentivise production may have limited impact on foreign exchange earnings. Textile exporters in Faisalabad argue that robust export rebates and energy subsidies are equally crucial to ensure competitiveness in global markets.

Implementation Challenges

Legislative Approval and Timing

The Federal Budget for FY 2025-26 is scheduled for presentation in the National Assembly on June 12, 2025. To implement the proposed Section 129 amendments, Parliament must pass the Finance Bill 2025 by late June. With the budget window narrow, the Finance Ministry is working consultatively with parliamentary committees to fast-track legal revisions. Any delays could jeopardise the relief’s effectiveness, causing confusion among taxpayers at the start of the new financial year.

Administrative Preparedness

Implementing the new exemption threshold and revised slabs requires rapid reconfiguration of FBR’s Integrated Tax Management System (ITMS). Challenges include:

• Re-programming Payroll Algorithms: Employers must update payroll software to calculate new tax liabilities from July 1, 2025.
  
• Training of Tax Officers: FBR will need to conduct workshops and issue circulars to field offices to ensure consistent enforcement.
  
• Public Awareness Campaigns: Ministries plan to collaborate with media and professional associations (e.g., Chartered Accountants of Pakistan) to inform employees and employers about the new brackets, filing deadlines, and potential savings.
  

Failure to coordinate these administrative elements could result in miscalculations, delayed refunds, and undue hardship for taxpayers—issues that fractured earlier relief efforts in 2023 when similar slabs were briefly amended before IMF pushback.

Revenue Monitoring and IMF Benchmarks

The IMF’s programme includes quarterly reviews of Pakistan’s fiscal performance, with emphasis on tax revenue collection and budget execution. If revenues lag targets due to excessive foregone tax, Islamabad may face a “waiver request,” renegotiating certain IMF-mandated conditions. Conversely, outperforming benchmarks could allow the government to expand social spending—on health, education, and subsidised fuels—providing an additional buffer to vulnerable populations.

Broader Economic Implications

Stimulating Consumer Demand

By reducing monthly tax deductions for an estimated 4 million salaried taxpayers, disposable incomes could collectively increase by roughly Rs 30 billion per month. Economists predict this retrenched liquidity will translate into higher spending on essentials—food, utilities, and transportation—marginally boosting GDP growth by 0.1–0.2 percentage points over the fiscal year. Sectors expected to benefit include:

• Automotive: Car and motorcycle dealers predict a 5–7% rise in sales as middle-income households gain modest relief.
  
• Retail & Fast Moving Consumer Goods (FMCG): Companies like Unilever Pakistan and Engro Foods anticipate a small uptick in sales volume, driven by renewed purchasing power.
  
• Mobile and Telecom Services: Prepaid mobile subscriber recharges and broadband upgrades may see increased activity as families adjust budgets.
  

Impact on Savings and Investments

With more take-home pay, some salaried workers may divert funds into savings instruments—national savings certificates, fixed-income mutual funds, or pension schemes—potentially deepening domestic capital markets. However, real interest rates remain subdued (around 1% real yield on T-bills), limiting incentives to lock away cash. Financial planners recommend that beneficiaries allocate at least 20% of incremental income towards retirement accounts or emergency funds to fortify financial resilience.

Socio-Political Stability

Pakistan’s political landscape is volatile, with coalition governments often precariously balanced. Providing targeted relief to the salaried class—perceived as a key voting bloc—could bolster public confidence and mitigate potential unrest. However, if broader grievances over unemployment, energy shortages, and inflation remain unaddressed, tax relief alone may prove insufficient to quell discontent. Civic groups, including the Pakistan Institute of Labour Education and Research (PILER), caution that sustained social stability demands holistic policies: job creation, education reform, and robust safety nets for the informal sector.

Comparative Perspective: Regional and Global Parallels

India’s Recent Tax Reforms

In 2024, neighbouring India revised its income tax slabs, increasing the rebate threshold from INR 250,000 to INR 300,000—a move that benefited approximately 50 million taxpayers, expanding the exemption from roughly Rs 2,000 monthly to Rs 2,500 monthly. While India’s per-capita GDP (US $2,300 in 2024) is higher than Pakistan’s (US $1,800), the political calculus was similar: provide relief to middle-income earners facing inflationary pressures. Pakistan watchers note that if India’s tax break helped sustain domestic demand, Islamabad hopes to emulate that effect, albeit on a smaller scale within its limited fiscal space.

Turkey’s Austerity Measures Versus Social Spending

Turkey, also grappling with high inflation and currency woes, opted in late 2023 to impose austerity—raising taxes and cutting subsidies—to stabilise its finances under a Stand-By Arrangement with the IMF. However, by mid-2024, social unrest compelled Ankara to reverse certain measures, reintroducing utility bill subsidies and modest tax cuts for low-income workers. This contrasting approach underscores the delicate trade-off faced by Pakistan: shave revenues where politically feasible, but ensure macro-stability to avoid market turmoil. Islamabad’s agreement to allow higher defence spending—a clear IMF concession—reflects this nuanced balancing act.

Path Ahead: From Negotiation to Implementation

1. Final IMF Staff-Level Agreement (SLA)
   An IMF technical team is due in Islamabad in the first week of June 2025 to conclude the Staff-Level Agreement for the sixth review of the EFF. The SLA will outline precise targets—revenue, deficit, debt stock—for the next twelve months, incorporating the agreed tax relief package. Any last-minute reversals or modifications could emerge from these discussions.
   
2. Parliamentary Passage of the Finance Bill
   The National Assembly must debate and pass the Finance Bill by late June. Opposition benches will seek clarifications on the revenue shortfall and potential compensatory measures—such as higher excise rates on luxury vehicles or surcharges on high-value property transactions. The Senate will also need to clear the Bill by early July, even if operating under a truncated schedule.
   
3. FBR’s ITMS Overhaul
   In May 2025, FBR awarded a Rs 500 million contract to an IT consortium to reconfigure payroll algorithms, upgrade e-filing modules, and issue updated tax-table circulars to employers by June 15. Effective coordination with the Pakistan Software Houses Association (P@SHA) and payroll software vendors is critical to prevent last-minute glitches when employers prepare July payrolls under the new slabs.
   
4. Public Outreach and Awareness
   Ministries plan to launch a “Know Your Tax Relief” campaign in late June, utilising TV, radio, and social media to guide salaried employees through the new brackets, filing requirements, and potential savings. Tax clinics in major cities—Karachi, Lahore, Islamabad—will offer free advice sessions conducted by Chartered Accountants and tax consultants.
   
5. IMF Reviews and Triggers
   The IMF will conduct quarterly reviews—September 2025, December 2025, March 2026—assessing revenue performance, defence outlays, and progress on structural benchmarks (e.g., pension reforms, state-owned enterprises’ loss reduction). Failure to meet key targets could delay expected disbursements of roughly US $600 million per quarter, thereby affecting foreign exchange liquidity and investor confidence.
   

Conclusion

The IMF’s agreement to grant income tax relief to Pakistan’s salaried class in the 2025-26 budget represents a notable shift in policy—prioritising social equity amid difficult macroeconomic constraints. By raising the annual tax-free threshold from Rs 600,000 to Rs 1 million and reducing marginal rates across slabs, the government aims to ease the burden on millions of middle-income households grappling with record inflation and currency depreciation. At the same time, the IMF’s concession to allow necessary defence budget increases highlights a pragmatic understanding of Pakistan’s security imperatives.

Nonetheless, implementing this relief package demands careful navigation: balancing revenue targets, ensuring administrative readiness, and maintaining fiscal discipline. With Pakistan set to present its budget on June 12, 2025, all eyes will be on the Finance Ministry to translate these commitments into actionable policy without destabilising hard-earned macroeconomic gains. If successful, the relief could stimulate consumer demand, improve taxpayer morale, and enhance socio-political stability. Yet, the real test lies in Islamabad’s ability to offset foregone revenues through stricter enforcement, broader tax base expansion, and prudent expenditure control—ensuring that the IMF programme stays on track while delivering tangible benefits to the salaried majority.

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Photo source: Google

Serrari Financial Analyst

By: Montel Kamau

3rd June, 2025