World Bank proposes tax reforms with 3% GDP growth projection for Pakistan
The World Bank has advised Pakistan to implement taxes on the agricultural and real estate sectors and merge the income thresholds for salaried and non-salaried individuals to create a progressive Personal Income Tax (PIT) system.
If agriculture income and property taxes are effectively enforced, they could contribute 3 per cent of the GDP annually, totaling over Rs3 trillion. The World Bank is awaiting approval for a $350 million allocation for Pakistan under RISE-II, with the meeting date yet to be confirmed.
Currently, the annual income threshold for salaried individuals is Rs600,000, and for non-salaried income, it stands at Rs400,000, both exempt from taxes.
The World Bank emphasises the urgency of Pakistan’s fiscal situation and the need to generate revenue and reduce expenditures, recommending taxing the wealthy while protecting the poor.
The World Bank proposes simplifying the income tax structure by aligning it for both salaried and non-salaried individuals, ensuring progressivity without suggesting a reduction in the current nominal threshold.
They acknowledge the importance of considering inflation and labour market changes in recent data when reforming the income tax structure.
The focus of the recommended tax reforms should fall on higher income brackets and include a comprehensive tax package and expenditure reforms to address unsustainable fiscal deficits.
These reforms involve cutting down on subsidy expenditures, eliminating regressive tax exemptions, and increasing the taxation of high-income earners, particularly in agriculture, property, and retail sectors, to enhance the progressivity of the tax system.
Regarding a question about lowering the current exemption threshold for salaried workers earning below Rs50,000 monthly, the World Bank’s lead economist clarified that the bank does not recommend a reduction in the current nominal threshold.
Instead, the emphasis is on streamlining the income tax structure for both salaried and non-salaried individuals to ensure progressivity while protecting the poor during the reform process.