In its most recent “Pakistan Development Update,” the World Bank suggested raising taxes on the salaried class as a first step toward expanding the tax base and regaining fiscal stability.
The income tax exemption threshold for salaried people (about Rs. 50,000/month) is established in an unfavorable way, keeping formally employed salaried people outside the tax net. At the same time, the bank noted that the threshold (Rs. 500,000/month) for the highest income tax rate for salaried people is also quite high and is probably only going to catch a very small percentage of taxpayers.
It explained that there are large differences in tax-free allowances, tax brackets, and tax rates between salaried people and other taxpayers, which runs the danger of causing economic inefficiencies and opening up chances for income shifting to avoid paying taxes. Additionally, a sizable portion of the tax base, which consists of self-employed people and sole entrepreneurs, including retailers, is not subject to income tax.
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Additionally, there are three different tax regimes with varying tax rates and unique rules for normal enterprises, small businesses, and SMEs in the manufacturing sector under the Corporate Income Tax (CIT) rates.
These differences encourage businesses to split apart or remain small. Additionally, Pakistan gives some businesses access to a simplified turnover tax regime, which benefits the businesses financially and lessens the incentives for them to spend money on formalizing their operations, expanding their customer base, and investing in accounting systems.
The CIT regime also offers a number of tax breaks. These include complete tax exemptions, lowered rates, credits, and exemptions that are given based on the industry, type of investment, and location. Pakistan’s thin-cap provisions only cover a small portion of the market, providing businesses with the opportunity to lower their tax obligations.
The bank has suggested enlarging the tax base by incorporating individuals and privately held companies, such as retailers, in the tax system, lowering the tax-free level, and streamlining the personal income tax structure. In order to prevent tax arbitrage, it has also advised combining the tax schedules for salaried and non-salaried taxpayers.
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Additionally, the World Bank has suggested eliminating concessional rates for sales taxes on items, restricting zero ratings, and capping sales tax exemptions for necessities like food and certain financial transactions.