Local experts challenge the IMF’s tax plan with innovative reforms

Islamabad:

Contrary to the International Monetary Fund’s (IMF) recommendation to raise tax rates in the next budget to raise an additional Rs 2 trillion, Pakistan’s renowned local experts on Monday unveiled a package that proposes to generate an additional Rs 1.2 trillion with reducing income tax rates and withdrawing certain exemptions.

A consortium of distinguished Pakistani tax experts and economists has prepared a package of tax reforms that promise higher revenues without stifling economic growth, businesses and individuals.

These experts claim that their proposed reforms will result in a net gain of Rs 4.1 trillion over three years, equivalent to a quarter of the 2022 tax base, without hurting the economy. This includes earnings of Rs 1.2 trillion in the first year from all four taxes. “The government should listen to its own people instead of hiring foreign consultants to prepare a ‘domestic package’,” said Dr Nadeemul Haq, Vice-Chancellor of the Pakistan Institute of Development Economics (PIDE), while criticizing the prime minister’s decision to hire experts import from the UK to do a local design.

The IMF has delivered a series of conditions to Pakistan that require it to levy additional taxes equal to Rs 2 trillion to meet the annual tax target of Rs 13 trillion in the next financial year. The additional collection is sought by the IMF through an increase in the tax burden on the self-employed and the self-employed and the elimination of sales tax exemptions.

Local experts have made their efforts within the framework of the consortium of PIDE and the Committee on Tax Reforms of the Policy Research Institute of the Market Economy (PRIME). The team includes heavyweights like former central bank governor Shahid Kardar, former IMF official Dr Nadeemul Haq, noted tax experts Dr Ikramul Haq and Syed Shabbar Zaidi, and former WTO official Dr Manzoor Ahmad.

These intellectually powerful individuals tried to offer a local solution compared to the imported prescriptions from the IMF and UK policy advisor Stefan Derkon.

Income tax

Local experts suggest that the government should impose the same tax rate regardless of the source of income. They propose to remove the exemption for agricultural income, including agricultural rental income, through a constitutional amendment, thereby making “income” a federal subject without any exemption. They support uniformity in the tax regime for all sources of personal and non-corporate income – a proposal also part of the IMF’s premise of taxing all income regardless of source.

However, contrary to the IMF’s condition to increase the tax burden on individuals by raising their tax rate to a record 45%, local experts suggest reducing the tax burden. They propose to increase the taxable income limit from Rs 600,000 to Rs 800,000 and revise it periodically. For an income of Rs 200,000, they propose a tax of 5% and for a monthly income of Rs 400,000, the proposed rate is 12.5%, significantly lower than what the IMF is asking for.

For a monthly income of Rs 800,000, local experts suggest a rate of 20%, while the IMF wants a tax rate of 45% for a monthly income of Rs 467,000. They are proposing a tax rate of 35% on monthly income above Rs 2.5 million. However, they believe that effective personal income tax rates should be 5 percentage points higher than the corporate income tax rate.

The effective income tax rate under existing marginal tax brackets for higher incomes is lower than the corporate tax rate, encouraging businesses to remain unincorporated. Local economists are calling for the reduction of corporate tax from 29% to 25%.

Another important recommendation includes the withdrawal of imputed rental income tax, capital gains tax, 10% surtax, 1.2% turnover tax and ending the presumptive and final tax regimes. They call for the restoration of investment credits for plant and machinery and a reduction in the number of withholding taxes, proposing a full withdrawal of the withholding tax regime except for payroll, interest, dividends and payments to non-residents.

About 68% of revenue is collected through withholding and minimum tax regimes, leading to inefficiencies and compliance challenges, said Ali Salman, head of PRIME. Experts also demand an end to the non-filer category, which was used to collect taxes instead of expanding the narrow tax base.

Despite these reforms, local experts claim that the Federal Board of Revenue (FBR) will still achieve a net increase of Rs 1.6 trillion in income taxes over three years, including Rs 246 billion in the first year. This includes a hypothetical gain of Rs 566 billion to businesses investing from savings from the tax rate cut and an income tax gain of Rs 346 billion from mandatory filing and sales tax reforms.

customs

Pakistan must adopt transparency and do away with the policy of ad-hoc hikes in regulatory and customs duties to meet fiscal targets, said Dr Haq. Experts suggest abolition of regulatory duties, additional customs duties, income tax withholding tax and sales tax on imports of capital goods and industrial inputs. The report states that the removal of exemptions and concessions will increase customs revenue. However, the withdrawal of regulatory and additional duties on imports will reduce customs revenue.

Despite a potential loss of Rs 596 billion over three years, the FBR will make a net gain of Rs 314 billion due to withdrawal of exemptions and recovery of actual taxes as required by law, the report said. They also suggest zero-rating imports of plant and machinery, industrial raw materials and intermediate goods and abolishing regulatory and additional duties and withholding income tax on imports.

Compared to the global average of 5%, import taxes in Pakistan are 46%.

General sales tax

Local experts support the IMF’s demand to end sales tax exemptions in GST, except in sectors like education and health. “Pakistan has no clear tax policy – only measures introduced sporadically on an ad-hoc basis creating uncertainty and lack of confidence,” Dr Haq said.

Local experts believe that with the GST reforms, Rs 2.6 trillion can be collected, including Rs 790 billion in the first year. The transition from the current VAT regime with high rates of 17% to 19% to full value added tax through the consolidation of points of sale with a low rate of 7% to 10% will positively affect VAT collection, said Ali Salman.