The World Bank (WB) has proposed a broad package of tax and expenditure reforms for Pakistan, aiming to address the country's fiscal deficits. The reforms were suggested on Tuesday, with the bank citing the Public Expenditure Review and Pakistan Development Update as its references.
The proposed changes include reducing subsidies, eliminating regressive tax exemptions, and increasing taxation on high-income earners in agriculture, property, and retail sectors. The bank also recommends maintaining the PKR50,000 monthly income tax exemption threshold for salaried workers and aligning tax structures for both salaried and non-salaried individuals. This alignment would take into account inflation and labor market changes, ensuring that the main tax burden falls primarily on higher incomes.
Tobias Haque and Najy Benhassine from the World Bank underscored the need to simplify Pakistan's tax structure to tackle its unsustainable fiscal deficit. They also emphasized the importance of preserving the current PKR50,000 (USD1 = PKR280.328) monthly income tax exemption threshold for salaried workers.
The World Bank advises Pakistan to impose taxes on its agricultural and real estate sectors, which could potentially lead to an annual tax collection equivalent to about 3% of the GDP or over PKR3 trillion. As part of a broader tax reform, it suggests merging the income tax thresholds for salaried (PKR600,000) and non-salaried individuals (PKR400,000) within a progressive Personal Income Tax system. This merger would be implemented gradually.
In addition to these reforms, the WB aims to protect low-income individuals by increasing social protection expenditures. The goal is to create a more progressive system by taxing higher-income individuals more heavily.
The World Bank's Executive Board is contemplating a $350 million financial aid package for Pakistan. The implementation of the RAAST Payment Systems is also being considered as part of this overall reform process.
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