Islamabad: The Federal Board of Revenue (FBR) is considering raising the tax rate on interest income earned from deposits in commercial banks and saving schemes by 2 percent for both filers and non-filers in the upcoming 2025-26 budget. This move comes as part of efforts to secure relief for the salaried class and other sectors with the consent of the International Monetary Fund (IMF).
Currently, the tax rate on interest income stands at 15 percent for filers and 35 percent for non-filers. The proposed increase aims to help bridge the emerging revenue gap caused by a shrinking formal sector and reduced tax collection following the imposition of high tax rates in the last fiscal year.
A senior official from the FBR, speaking on condition of anonymity, told The News that the IMF has yet to approve the final proposal. The official noted, “It is one of the options to increase tax rates on passive income, as individuals and companies place money in commercial banks and saving schemes.”
Experts have expressed concerns over the proposed hike. Dr Muhammad Iqbal, former FBR Member Tax Policy, said the current 15 percent rate on interest income is already high, considering that the principal amount on which interest is earned has usually been taxed previously. He further explained that the 15 percent rate applies to interest income up to Rs5 million annually, with incomes beyond that subject to regular tax rates.
“If this rate is increased, it will hurt those relying on interest from their savings, especially at a time when bank returns are falling due to policy rate cuts,” Dr Iqbal said. He warned that higher taxes might discourage deposits, adversely affecting commercial banks. He also questioned the rationale behind taxing interest income at a rate different from dividends, which currently face a 15 percent tax rate.
Meanwhile, sectors such as tobacco and beverages have reported volume declines and have requested tax relief. The beverage industry proposed reducing the federal excise duty (FED) from 20 percent to 15 percent. The tobacco sector’s contribution to tax revenue is expected to fall by Rs45 billion, from Rs292 billion in fiscal year 2023-24 to Rs247 billion in 2024-25.
The government continues to seek a balance between providing relief to taxpayers and ensuring sufficient revenue collection to meet its fiscal targets in the face of IMF programme conditions.
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