The World Bank in its latest ‘Pakistan Development Update’ has recommended more taxes on the salaried class as a prelude to broadening the tax base and restoring fiscal responsibility.
Within salaried individuals, the income tax exemption threshold (<Rs. 50,000/month) is set sub-optimally high, leaving formally employed salaried individuals outside of the tax net. At the same time, the threshold (Rs. 500,000/month) for the top income tax bracket for salaried individuals is also very high and is likely to only capture a very limited number of taxpayers, the bank stated.
It explained that tax-free allowances, tax brackets, and tax rates differ significantly between salaried individuals and other taxpayers, which risks generating economic distortions and creating opportunities for tax avoidance through income shifting. In addition, a significant tax base comprising of unsalaried individuals and sole proprietors including retailers is out of the income tax net.
Also, the Corporate income tax (CIT) rates differentiate between three different regimes with different tax rates and special provisions applied to standard companies, small firms, and SMEs in the manufacturing sector.
These differentiations generate incentives for firms to split or stay small. Additionally, Pakistan provides certain firms access to a simplified turnover tax regime, which is both financially lucrative for the firms and reduces incentives for them to invest in accounting systems, business formalization, and expansion.
The CIT regime also provides for various tax incentives. These include outright tax holidays, reduced rates, credits, and exemptions granted by sector, investment type, and location. Pakistan’s thin-cap provisions only have limited coverage, opening opportunities for firms to reduce their tax liabilities.
The bank has recommended broadening the tax base by bringing individuals and individually owned businesses, including retailers, into the tax system, reducing the tax-free threshold, and simplifying the structure of the personal income tax. It has further suggested merging the tax schedules for salaried and non-salaried taxpayers to eliminate opportunities for tax arbitrage.
World Bank has also proposed removing concessional rates on sales tax on goods, limiting zero ratings, and limiting sales tax exemptions on basic food, basic public health services, and selected financial transactions.
Source: Pro Pakistani