The World Bank has recommended that Pakistan consider taxing monthly salaries below Rs50,000 and reduce the income threshold for charging the highest income tax rate of 35% for salaried individuals. This recommendation is part of the World Bank’s efforts to restore fiscal sustainability in Pakistan, which includes expanding the tax base, rationalizing expenditures, and other measures.
Currently, monthly salaries of Rs50,000 or less are exempt from income tax in Pakistan. The World Bank suggests lowering this threshold, but some argue that this recommendation doesn’t align with the country’s economic realities, especially considering the high inflation rate.
The World Bank suggests that the government should lower the threshold for the top income tax bracket, which currently applies a maximum tax rate of 35% to individuals earning over Rs500,000 per month. This threshold was already reduced earlier in the year from Rs1 million per month under pressure from the International Monetary Fund (IMF).
The report points out that the salaried class paid significantly more taxes in the last fiscal year compared to wealthy exporters in Pakistan. These recommendations by international financial institutions like the World Bank and the IMF may place additional burdens on the salaried class, potentially leading to social unrest.
The World Bank also recommends broadening the tax base by including unsalaried individuals, and sole proprietors (including retailers), and simplifying the personal income tax structure. It proposes merging tax schedules for salaried and non-salaried taxpayers to eliminate tax avoidance opportunities.
On the agriculture front, the World Bank suggests reducing the tax-free land threshold for agricultural land to include more landowners in the tax net.
Overhaul Sales Tax System for Revenue Boost
Furthermore, the World Bank recommends reforming Pakistan’s sales tax system by ending concessional tax rates, limiting zero-rating to exports, and reducing exemptions. The sales tax system currently costs Pakistan a significant portion of its revenue potential.
In terms of corporate income tax, the World Bank suggests rationalizing the tax regime to remove incentives for firms to stay small or split.
To rationalize expenses, the World Bank recommends reviewing development expenditures, canceling projects lacking proper preparation and prioritization, and delaying projects that may not benefit the poor.
The report also highlights the need to address high pension expenses and the importance of fiscal coordination and legal reforms to support a national fiscal policy in Pakistan.
