While recommending the merging of salaried and non-salaried class thresholds in order to make Personal Income Tax (PIT) progressive, the World Bank (WB) has asked Pakistan to bring agricultural income and properties into the tax net.

The WB assessed that the agriculture income and properties tax if enforced properly could bring 3 percent of GDP in the tax collection on an annual basis, equivalent to slightly over Rs3 trillion.The World Bank is also expecting the RISE-II of $350 million for Pakistan to be approved but no date for the meeting of the Executive Board can yet be confirmed.At the moment, the salaried income threshold of Rs600,000 on an annual basis is exempted while for non-salaried income, the exempted limit is standing at Rs400,000 per annum.“Pakistan is in a very difficult situation as its fiscal deficit is unsustainable. There is a need to undertake a combination of measures to generate revenues and reduce expenditures. We are recommending to tax rich and wealthy while protecting the poor,” the World Bank’s lead economist in Pakistan Tobias Haque said while briefing a select group of reporters on Monday. The WB’s Country’s Country Director Najy Benhassine was also present on the occasion.The World Bank certainly does not recommend any reduction in the current nominal threshold. “We recommend that Pakistan simplifies its income tax structure, including aligning the income tax structure for salaried and non-salaried individuals ensuring progressivity.”The 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.To a query whether the WB recommended adoption of same income tax structure to be applied to both salaried and non-salaried individuals, he said in affirmation and explained further that this change should be introduced over time, as part of a broader tax reform, while making sure the burden falls on higher incomes brackets.Tobias Haque stated that the World Bank has recommended a comprehensive package of tax and expenditure reforms to reduce unsustainable fiscal deficits and has consistently emphasised that the poor should be protected through any reform process, including through increased social protection expenditures.The reforms should include reducing subsidy expenditure, 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 progressivity of the system. The increased taxation should fall on the higher incomes and reduce the nominal threshold.Responding to a query if the World Bank recommended lowering the current exemption threshold for income tax for salaried workers earning below the current Rs50,000 monthly threshold, the lead economist said, “ No”. The World Bank certainly does not recommend any reduction in the current nominal threshold. We recommend that Pakistan simplifies its income tax structure, including aligning the income tax structure for salaried and non-salaried individuals, while ensuring progressivity.The 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.To a query does the World Bank recommend that the same income tax structure should be applied to both salaried and non-salaried individuals, he said yes. However, this change should be introduced over time, as part of a broader tax reform, while making sure the burden falls on higher incomes.The World Bank does not recommend any particular new level of the income floor above which salaried and non-salaried individuals should pay income tax. The appropriate changes to tax thresholds should be assessed based on new survey data and designed to protect low incomes. 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 welloff.


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2023-10-10

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