Income Tax Reform: World Bank’s Focus on Salaries Exceeding 50,000 and 5 Lakh

income-tax-reform

The World Bank has presented a comprehensive set of recommendations with the objective of overhauling Pakistan’s income tax system and fortifying fiscal sustainability. These proposals, if put into practice, have the potential to use significant influence over diverse income segments within the nation.

At the core of the World Bank’s suggestions is the proposal to introduce income taxation for individuals earning less than Rs50,000 per month, coupled with a reduction in the income threshold that triggers the highest tax rate of 35% for those earning above Rs500,000 per month. The purpose behind these alterations to the tax brackets is twofold: broaden the tax base and distribute the tax burden more equitably. However, there are concerns that these changes could impact middle-income individuals who are already subject to taxation on their gross earnings, without the ability to deduct expenses, unlike more affluent taxpayers in Pakistan.

These recommendations are an integral part of the World Bank’s overarching strategy to restore fiscal sustainability in Pakistan. This comprehensive strategy encompasses measures designed to expand the tax base by including previously untaxed sectors and rationalizing government expenditures. It also highlights the necessity of confining federal spending within provincial mandates to enhance accountability in service delivery. As part of this initiative, the World Bank proposes a review of the 7th National Finance Commission Award to align financing with the respective responsibilities of provincial and federal governments.

income-tax-reform

Currently, the World Bank deems the income tax exemption threshold for salaried individuals in Pakistan as excessively high, resulting in the exclusion of many formally employed individuals from taxation. Additionally, the top income tax bracket for salaried individuals is considered too elevated, imposing a 35% tax rate on those earning above Rs500,000 per month. The World Bank advises reducing this threshold, a move in line with previous adjustments made under IMF guidance.

An issue arising from these proposals is the potential burden they may impose on Pakistan’s salaried class, which already constitutes a significant contributor to tax revenues. These recommendations have sparked concerns about the possibility of social unrest.

To address these concerns, the World Bank advocates for the expansion of the tax base by incorporating unsalaried individuals and sole proprietors, such as retailers, into the tax system. This entails lowering the tax-free threshold and streamlining the structure of personal income tax. Furthermore, the merging of tax schedules for salaried and non-salaried taxpayers is proposed to eliminate opportunities for tax arbitrage.

Lastly, the World Bank underscores the necessity of controlling pension spending, noting that Pakistan’s pension expenses rank as the highest in South Asia. Strategies to curtail the growth in pension spending include indexing it to inflation with an upper limit, setting a minimum retirement age for benefits, and imposing restrictions on eligible dependents for survivorship benefits.

Ammara Ahmed

Ammara Ahmed

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