The International Monetary Fund (IMF) has put forth a significant proposal for Pakistan’s tax system, urging the reduction of tax slabs for both salaried and business-class individuals from seven to four.
The suggested reform also entails more than doubling the tax collection from businesses and salaried individuals.
This recommendation stems from a comprehensive two-week study conducted by the IMF’s technical mission, which recently concluded its assessment of Pakistan’s tax policies. The mission not only proposed streamlining the tax slabs but also advocated for an increase in sales tax rates to 18 percent.
While the visiting IMF team has already shared its findings with the federal government, the official draft report is expected to be released soon.
However, the proposed changes have met with some hesitation from tax officials, particularly in light of the already substantial tax burden on the salaried class. Currently, salaried individuals face income tax rates ranging from 2.5 percent to 35 percent based on their annual income.
The IMF’s suggestion to reduce the number of tax brackets to four could disproportionately impact low to middle-income groups, causing a drastic increase in their tax burden.
Individuals earning between Rs. 200,000 and Rs. 300,000 per month, who already bear the highest tax burden, stand to be most affected if the proposed reforms are implemented. Eliminating two to three tax slabs could result in a substantial spike in tax rates for this income group. Notably, the IMF’s proposal does not address the significant tax base comprising unsalaried individuals and retailers, who are currently exempt from income tax.
In addition to the changes in income tax, the IMF suggested discontinuing the favorable sales tax rates outlined in the 8th Schedule of the Sales Tax Act. This move would entail restoring sales tax on hundreds of items to the standard 18 percent rate, marking a significant shift in the country’s taxation landscape.
As Pakistan awaits the official release of the IMF’s draft report, the proposed tax reforms are expected to generate considerable debate and inspection, particularly concerning their potential impact on different income groups and the overall economic stability.
