The federal budget for FY2026-27 is under preparation with one undeniable reality: the salaried class now is the most exploited source of state revenue.
According to data released by the FBR for FY2024-25, the salaried class contributed Rs605.953 billion income tax at source, registering an increase of 54.7 per cent and representing one of the most compliant segments of the economy.
Every year, the government speaks of broadening the tax base, taxing untaxed wealth, documenting the economy and ensuring equitable burden sharing. However, every federal budget repeats the same old pattern. The documented and compliant salaried segments are squeezed further through heavy direct/indirect levies and inflation, which is taxation without legislation. What makes the situation more painful is the fact that tax expenditure of billions persists as the powerful continue to enjoy exemptions, waivers and concessions.
This persistent over-taxation of salaried individuals is a form of economic persecution that threatens the survival of Pakistan’s middle classes. The salaried class in the formal sector is perhaps the only segment of society whose income is fully visible, documented and taxed at source.
Unlike traders dealing in cash, speculative real-estate investors, politically-connected rent seekers or large segments of the informal economy, salaried persons cannot conceal income or manipulate accounts. Employers deduct taxes before salaries are even credited. The FBR already possesses complete records of their earnings. Yet instead of rewarding honesty and compliance, the state has converted this transparency into an opportunity for relentless extraction.
The situation has become especially oppressive after years of hyperinflation. Food prices, electricity tariffs, gas charges, transport costs, rents, healthcare and educational expenses have all risen dramatically. Salaries may have increased nominally, but in real terms, purchasing power has sharply declined. Unfortunately, the tax system refuses to recognise this economic reality.
The government continues to tax inflation-adjusted salary increases as if they represent additional prosperity. In truth, many salaried families are merely struggling to maintain subsistence-level living standards. A salary increase granted to offset inflation is not real income growth; it is survival compensation. Taxing it aggressively amounts to penalising inflation victims.
The persistence of an annual tax-free threshold of merely Rs600,000 has become economically indefensible. In major urban centres, even basic household survival now requires several times that amount. A person earning Rs50,000 per month can no longer be classified as economically secure.
The state, however, continues to treat lower and middle-income salaried individuals as ‘taxable capacity’ while ignoring the collapse in real incomes caused by inflation and currency depreciation. The burden becomes even more unbearable when one considers the multiplicity of indirect taxes imposed on the same individuals.
Salaried persons do not merely pay income tax. They also pay sales tax on electricity and gas bills, petroleum levy on fuel, taxes on mobile usage, indirect taxes embedded in food and household products, and numerous advance minimum/adjustable taxes deducted throughout the year.
This is occurring in a country where citizens receive extremely poor public services in return. Most salaried families are forced to rely on private education because public schools have deteriorated. Healthcare expenses are borne privately because government hospitals are dysfunctional. Public transport systems remain inadequate, forcing dependence on expensive private commuting arrangements. Security, sanitation and municipal services remain deeply deficient despite the enormous tax burden imposed on citizens. In other words, the state taxes salaried citizens heavily and then compels them to purchase privately the very services that taxation is supposed to finance.
Meanwhile, many privileged sectors remain undertaxed or effectively untaxed. Vast agricultural incomes of rich absentee landowners escape meaningful taxation under provincial laws. Speculative gains in real estate often enjoy preferential treatment. The undocumented wholesale and retail sectors continue operating largely outside the documented economy. Smuggling, under-invoicing and illicit capital accumulation persist despite repeated promises of reform.
Over the years, Pakistan’s tax structure has become regressive in the worst possible sense: those easiest to tax bear the heaviest burden while those possessing political and economic power remain protected. The consequences are now visible across society. The middle classes are steadily collapsing.
Professionals, teachers, engineers, doctors, IT specialists and private-sector employees increasingly view emigration as their only path to financial survival. Brain drain has accelerated because many educated individuals no longer see a viable economic future within Pakistan. This should alarm policymakers. No country can sustain economic development after destroying its productive and compliant middle classes.
The tragedy is compounded by the government’s continued reliance on withholding and minimum/presumptive taxation regimes instead of genuine structural reform. Pakistan’s fiscal authorities repeatedly prefer short-term extraction over long-term economic sustainability. Every budget becomes an exercise in meeting revenue targets demanded by external lenders rather than designing a fair and growth-oriented tax system. The salaried sector has effectively become collateral damage in this flawed fiscal model.
Budget 2026-27 offers an opportunity to reverse this injustice, but only if policymakers abandon the prevailing extraction mentality. The first and most urgent step should be a substantial upward revision in the tax-free income threshold in line with inflation and living costs. Tax slabs must be rationalised to protect lower and middle-income earners instead of pushing them deeper into economic insecurity.
Second, inflation indexing should be incorporated into tax policy. Without automatic inflation adjustments, governments continue exploiting nominal salary increases to generate artificial revenue growth. This practice is economically dishonest and socially destructive.
Third, the burden of indirect taxation on salaried classes must be reduced. Petroleum levy, excessive taxation on electricity and punitive withholding taxes on essential transactions have become unbearable. A meaningful relief package for salaried individuals requires reductions not only in direct taxes but also in indirect fiscal extraction.
Most importantly, the state must finally broaden the tax base towards untaxed wealth and speculative sectors instead of repeatedly targeting documented incomes. Pakistan cannot achieve fiscal stability by continuously squeezing compliant citizens while politically influential sectors remain outside effective taxation.
Equally necessary is rationalisation of state expenditures. Citizens cannot indefinitely finance an inefficient governance structure marked by waste, privileges and unproductive expenditures. Tax reform without expenditure reform merely converts taxpayers into permanent financiers of state inefficiency.
The excessive taxation of salaried classes is no longer simply a revenue issue; it is a question of economic justice, constitutional morality and social survival. Article 3 of the constitution obligates the state to eliminate exploitation and ensure equitable distribution of wealth. The existing taxation policies on the contrary are producing the opposite outcome – concentration of privileges for elites and increasing hardship for compliant middle-income groups.
If Budget 2026-27 also continues placing the primary burden on salaried classes while leaving structural inequities untouched, the consequences will extend far beyond revenue collection. Pakistan will continue losing its professional workforce, shrinking its middle classes and weakening the very social foundations necessary for economic stability.
The writer is an advocate of the Supreme Court, adjunct faculty at LUMS and a member advisory board of PIDE.
