World Bank Report Highlights the Need for Increased Taxation in Pakistan

increased-taxation-in-pakistan

In its latest ‘Pakistan Development Update,‘ the World Bank has released a set of recommendations focused on enhancing tax collection within the salaried class, with the main goal of expanding the tax base and reinstating fiscal accountability.

The World Bank has raised concerns about the present income tax exemption threshold for salaried individuals, which is currently set at less than Rs. 50,000 per month, thinking it excessively high. This high threshold has the effect of excluding formally employed salaried individuals from the tax bracket. Simultaneously, the highest income tax threshold for salaried individuals, set at Rs. 500,000 per month, is also regarded as excessively high and is projected to encompass only a limited number of taxpayers, as per the World Bank’s assessment.

The institution further clarifies that there exist significant differences in terms of tax-free allowances, tax brackets, and tax rates between salaried individuals and other categories of taxpayers. These differences carry the risk of causing economic imbalances and providing avenues for tax evasion through income manipulation. Furthermore, a substantial portion of the tax base, comprising unsalaried individuals and sole proprietors, including retailers, remains exempt from income tax.

The World Bank highlights discrepancies in Corporate Income Tax (CIT) rates among various segments, such as standard companies, small firms, and SMEs in the manufacturing sector. These variations in tax rates and special provisions may incentivize firms to either split or remain small.

Moreover, the CIT government includes a range of tax incentives, including tax holidays, reduced rates, credits, and exemptions that are granted based on the sector, type of investment, and location. The World Bank observes that Pakistan’s thin-cap provisions have limited coverage, providing opportunities for firms to reduce their tax liabilities.

To address these issues, the World Bank recommends a strategy of increase the tax base, which includes bringing individuals and individually owned businesses, including retailers, into the tax system. This entails lowering the tax-free threshold and simplifying the structure of personal income tax. Additionally, the merging of tax schedules for both salaried and non-salaried taxpayers is proposed to eliminate opportunities for tax manipulation.

Ammara Ahmed

Ammara Ahmed

Leave a Reply

Your email address will not be published. Required fields are marked *