ISLAMABAD: The World Bank (WB) has recommended taxation of agricultural income and property, withdrawal of regressive tax exemptions, increased taxation of high-income earners, and simplification of the structure of the personal income tax.

This was stated by Tobias Haque, the WB’s lead country economist, and Najy Benhassine, World Bank country director for Pakistan, while briefing journalists here on Monday.

Tobias Haque, the WB’s lead country economist, stated that the government should increase taxation of revenue basis from which the very wealthy drive income including agriculture and property.

World Bank projects primary balance at negative 0.4pc

The government can generate two percent of the GDP from property and one percent of the GDP from agriculture. The highest priority of the revenue reforms included the withdrawal of tax exemptions and improving the functionality of the sales tax system.

The provincial governments have the mandate to tax agriculture/ land. If the provincial governments increase revenue, this would reduce the burden on the federal government. The income tax structure for salaried and non-salaried individuals should be aligned.

“The priority of personal income tax reforms is to simplify the system, but there is a limited revenue potential from the personal income tax reforms,” he stated.

“Pakistan is in a very difficult position. The fiscal deficit is unsustainable. There is a need to reduce the expenditure and increase revenue. This means that the government is required to do difficult reforms. The WB firmly believes that the revenue reforms should be targeted at increasing revenue”, he maintained.

Haque stated that the World Bank has recommended a comprehensive package of tax and expenditure reforms to reduce unsustainable fiscal deficits and has consistently emphasized that the poor should be protected through any reform process, including through increased social protection expenditures.

The reforms should include reducing subsidy expenditures, 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 the progressivity of the system. The increased taxation should fall on the higher incomes and reducing the nominal threshold today would not achieve that.

Responding to a query that does the World Bank recommend 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 labour 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 that 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 well-offs.”

Copyright Business Recorder, 2023