World Bank Proposes Income Tax rate for salaries above 50,000 and 5 Lakh

Web DeskOctober 4, 20234535 min
World Bank Proposes Income Tax rate for salaries above 50,000 and 5 Lakh

The World Bank has suggested Pakistan consider implementing income taxation on salaries below Rs50,000 per month and reduce the income threshold for charging the highest tax rate of 35% to individuals earning over Rs500,000 per month. This recommendation, if adopted, may impact the already heavily taxed income group, as they currently pay taxes on their gross earnings without the ability to deduct expenses, unlike wealthier individuals in Pakistan.

These proposals are part of the World Bank’s strategy to restore fiscal sustainability, which includes measures to broaden the tax base by incorporating previously untaxed sectors and rationalizing government expenditures. The World Bank also aims to limit federal spending within provincial mandates to enhance accountability for service delivery. As part of this effort, the World Bank suggests revisiting the 7th National Finance Commission Award to align financing with the responsibilities of provincial and federal governments.

Read more:IMF Chief’s Call at UNGA: urges Pakistan to tax rich and protect poor

The current income tax exemption threshold for salaried individuals in Pakistan is considered too high by the World Bank, excluding many formally employed individuals from the tax net. Additionally, the top income tax bracket for salaried individuals is also seen as excessively high. The government currently imposes a maximum 35% income tax rate on individuals earning over Rs500,000 per month. The World Bank suggests reducing this threshold, aligning with previous changes made under IMF pressure.

In the previous fiscal year, the salaried class paid significantly more in taxes (Rs264 billion) compared to Pakistan’s wealthiest exporters (Rs74 billion). The recommendations by the World Bank and the IMF have raised concerns about the potential burden on the country’s salaried class, possibly leading to social unrest.

The World Bank proposes expanding the tax base by including unsalaried individuals and sole proprietors, such as retailers, in the tax system. This would involve lowering the tax-free threshold and simplifying the structure of personal income tax. Merging tax schedules for salaried and non-salaried taxpayers is also suggested to eliminate tax arbitrage opportunities.

On the agriculture front, the World Bank recommends reducing the tax-free threshold for agricultural land to include more land in the tax net. Currently, farmers owning 12.5 to 25 acres pay only Rs100 per acre in taxes.

The World Bank also calls for reforms in the sales tax law, particularly the elimination of concessions primarily used by wealthier individuals and businesses. The report suggests limiting zero-rating to exports and narrowing the scope of sales tax exemptions.

The World Bank notes that Pakistan’s corporate income tax (CIT) system, with three different CIT rates, may incentivize firms to stay small. It recommends rationalizing the corporate tax regime.

In terms of expenses, the World Bank suggests reviewing development expenditures and canceling projects that lack proper preparation, selection, and prioritization. Additionally, it proposes delaying projects unlikely to benefit the poor.

Lastly, the World Bank emphasizes the need to control pension spending, stating that Pakistan’s pension expenses are the highest in South Asia. Measures to limit growth in pension spending include indexing to inflation with a cap, establishing a minimum retirement age for benefits, and restricting eligible dependents for survivorship benefits.

The World Bank recommends resurrecting institutions for fiscal coordination and implementing legal reforms to support a national fiscal policy in Pakistan.

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