The World Bank (WB) has recommended Pakistan reduce subsidy expenditures, close regressive tax exemptions, and increase taxation of high-income earners, including via improved taxation of agriculture, property, and retail sectors.

Officials told a selected group of reporters here on Monday that the WB has recommended that Pakistan simplify its income tax structure, including aligning the income tax structure for salaried and non-salaried individuals, while ensuring progressivity.

The lender did not recommend any reduction in the current exemption threshold for income tax for salaried workers earning below the current Rs. 50,000 monthly threshold.

Previous analysis included in the Public Expenditure Review using 2019 data suggested that a reformed income tax structure could include a lower exemption threshold for salaried individuals, but this analysis would need to be updated to take account of recent inflation and labor market changes to make sure low incomes are not affected.

The recommendation in the Pakistan Development Update should have been clearer on the need for new analysis needed on more recent data to inform this reform. WB economist said that the World Bank recommended a comprehensive package of tax and expenditure reforms to reduce unsustainable fiscal deficits and has consistently emphasized that the poor should be protected through any reform process, including through increased social protection expenditures.

Reforms should include reducing subsidy expenditures, closing regressive tax exemptions, and increasing taxation of high-income earners, including via improved taxation of agriculture, property, and retail sectors.

Most importantly this reform should increase the progressivity of the system. Increased taxation should fall on the higher incomes and reducing the nominal threshold today would not achieve that.

The same income tax structure should be applied to both salaried and non-salaried individuals. However, this change should be introduced over time, as part of a broader tax reform, while making sure the burden falls on higher incomes, WB officials said.

We are recommending, overall, a comprehensive tax reform that would make the overall system much more progressive than it is today: increasing the tax burden on the most well-off, WB officials added.

Source: Pro Pakistani