World Bank Recommends Further Taxation on Salaried Class in Pakistan

The World Bank has recently made a series of recommendations to the Pakistani government aimed at restoring fiscal sustainability in the country. Among these recommendations are proposals to tax monthly salaries below Rs50,000 and reduce the income threshold for charging the highest income tax rate of 35% for salaried individuals. In this blog post, we’ll delve into these recommendations, their potential impact, and the broader implications for Pakistan’s economy and its salaried class.

The World Bank’s proposal suggests that Pakistan should start taxing monthly salaries below Rs50,000. Currently, individuals earning less than this amount are exempt from income tax. Additionally, the World Bank recommends further reducing the income threshold for the highest income tax rate, which currently stands at Rs500,000 per month.

While these recommendations are put forward with the aim of broadening the tax base and improving fiscal sustainability, they pose several challenges and concerns. One of the primary concerns is the potential burden it may place on the already struggling salaried class in Pakistan. Unlike the wealthiest individuals who have the facility to adjust expenses before paying taxes, salaried individuals are taxed on their gross earnings, leaving them with limited options for tax optimization.

As per the Pakistan Development Outlook report released by the World Bank, the current income tax exemption threshold for salaried individuals is considered “sub-optimally high,” resulting in formally employed salaried individuals remaining outside the tax net. While the World Bank’s recommendation may aim to address this issue, it may not align with the economic realities faced by the people, especially considering the high inflation rate projected for the fiscal year.

The report also highlights that the threshold for the top income tax bracket for salaried individuals is excessively high, capturing only a limited number of taxpayers. The government currently charges a maximum 35% income tax rate from individuals earning over Rs500,000 per month, and the World Bank suggests further lowering this threshold.

It’s important to note that in the previous fiscal year, the salaried class in Pakistan contributed significantly to tax revenue, paying Rs264 billion in taxes compared to the Rs74 billion paid by the country’s wealthiest exporters. These recommendations, if implemented, could potentially disadvantage the salaried class and lead to social unrest.

The World Bank also proposes broadening the tax base by including individuals and individually owned businesses, including retailers, into the tax system. This would involve reducing the tax-free threshold and simplifying the structure of personal income tax. The merging of tax schedules for salaried and non-salaried taxpayers is also recommended to eliminate opportunities for tax arbitrage.

The World Bank suggests reducing the tax-free slab for agricultural land to bring more agricultural land into the tax net. Additionally, the sales tax system, which currently offers numerous concessions, should be reformed. Concessionary sales tax rates should be limited, and the zero-rating facility should be reserved for exports and essential goods.

Pakistan’s corporate income tax (CIT) rates have created incentives for firms to stay small, and certain firms benefit from a simplified turnover tax regime. The World Bank proposes rationalizing the corporate tax regime to address these issues.

To improve fiscal sustainability, the World Bank recommends reviewing development expenditure and cancelling projects that have not undergone proper project preparation and prioritization. Furthermore, controlling pension spending, which is currently the highest in South Asia, is suggested through measures such as automatic indexation to inflation and instituting a minimum retirement age.

The report also emphasizes the need for fiscal coordination and suggests the resurrection of institutions such as the Council for Common Interests. Legal reforms to support a national fiscal policy are also recommended.

In conclusion, the World Bank’s recommendations for taxation and fiscal reforms in Pakistan have the potential to significantly impact the salaried class and the country’s economic landscape. While the aim is to restore fiscal sustainability, it’s crucial for the government to carefully consider the implications and potential consequences of these proposals to ensure a balanced and equitable approach to taxation and fiscal policy.