The World Bank has put forth a series of recommendations aimed at restructuring Pakistan’s income tax system and enhancing fiscal sustainability. These proposals, if adopted, could significantly impact various income groups in the country.
World Bank is to introduce income taxation for individuals earning below Rs50,000 per month and lower the income threshold by charging the highest tax rate of 35% to those earning over Rs500,000 per month. This adjustment in tax brackets aims to increase the tax base and ensure a fairer distribution of the tax burden. However, it could potentially affect middle-income individuals who already pay taxes on their gross earnings without the ability to deduct expenses, unlike wealthier taxpayers in Pakistan.
These suggestions are part of the World Bank’s broader strategy to restore fiscal sustainability in Pakistan. This strategy includes measures to expand the tax base by incorporating sectors that were previously untaxed and rationalizing government expenditures.
The World Bank also emphasizes the need to limit federal spending within provincial orders to enhance accountability for service delivery. As part of this effort, the 7th National Finance Commission Award is recommended to be revisited to align financing with the responsibilities of provincial and federal governments.
The current income tax exemption threshold for salaried individuals in Pakistan is regarded as excessively high by the World Bank, resulting in many formally employed individuals being exempt from taxation. Furthermore, the top income tax bracket for salaried individuals is seen as too high, with a 35% tax rate applied to those earning over Rs500,000 per month.
The World Bank suggests reducing this threshold, aligning with previous changes made under IMF pressure.
One concern arising from these recommendations is the potential burden on the country’s salaried class, which already contributes significantly to tax revenues. The World Bank’s proposals have raised concerns about the possibility of social unrest.
The World Bank also highlights concerns regarding Pakistan’s corporate income tax (CIT) system, which has three different CIT rates, potentially incentivizing firms to remain small. The institution recommends rationalizing the corporate tax government. The World Bank’s recommendations aim to create a fairer and more sustainable fiscal system in Pakistan. While they offer potential benefits in terms of increasing the tax base and enhancing fiscal responsibility, they also raise concerns about their impact on different income groups and the overall economic landscape. The implementation of these proposals will be closely watched in the coming months.
