ISLAMABAD: The World Bank (WB) has urged the Pakistani government to consider implementing significant tax reforms, including taxing monthly salaries below Rs 50,000 and lowering the income threshold for charging the highest income tax rate of 35 percent from salaried individuals, according to its latest recommendations.
However, this recommendation appears disconnected from the economic realities faced by Pakistan’s citizens, who are grappling with rising inflation, projected at 26.5 percent for the current fiscal year.
If adopted, the WB’s recommendations could place additional financial burdens on an already heavily taxed income group, which currently pays taxes on their gross earnings without the benefit of adjusting expenses before tax deductions, a privilege enjoyed by the country’s wealthiest individuals.
The proposals are part of the WB’s broader plan to restore fiscal sustainability in Pakistan, which involves widening the tax base to include untaxed areas and rationalizing government expenditures. The World Bank also suggests limiting federal spending to align with provincial mandates, thereby reducing federal expenditures and enhancing accountability for service delivery.
The World Bank’s Pakistan Development Outlook report, released on Tuesday, points out that the income tax exemption threshold for salaried individuals is set too high, leaving formally employed salaried individuals outside the tax net. Currently, monthly salaries of up to Rs 50,000 are exempt from income tax, and the WB has recommended reducing this threshold.
The report also underscores that the income tax threshold for the top bracket is exceedingly high and captures only a limited number of taxpayers. The government presently imposes a maximum 35 percent income tax rate on individuals earning over Rs 500,000 per month, a threshold that was halved in June under pressure from the International Monetary Fund (IMF), a move that the WB now suggests further lowering.
In the previous fiscal year, the salaried class contributed Rs 264 billion in taxes, whereas Pakistan’s wealthiest exporters paid only Rs 74 billion. The World Bank’s recommendations, in tandem with those of the IMF, have created a disadvantageous position for the country’s lower-income salaried class.
The World Bank’s report highlights disparities in tax allowances, brackets, and rates between salaried individuals and other taxpayers, which could result in economic distortions and opportunities for tax avoidance through income manipulation.
The lender suggests broadening the tax base by incorporating unsalaried individuals and sole proprietors, including retailers, into the tax system. It proposes reducing the tax-free threshold and simplifying the structure of personal income tax while merging the tax schedules for salaried and non-salaried taxpayers to eliminate opportunities for tax arbitrage.