In a bid to address Pakistan's underperforming tax collection and unsustainable fiscal deficits, the World Bank (WB) has advised the country to expand its tax base and remove all tax exemptions. The bank's recommendations were made public on Tuesday, with a focus on incorporating incomes from agriculture, properties, and retail businesses into the effective tax net.
Pakistan's current tax collection shortfall stands at approximately Rs 737 billion ($4.4 billion), as per a recent World Bank report. The bank identified substantial amounts of untaxed wealth in sectors such as agriculture and real estate, with the latter alone being under-taxed by Rs 402 billion ($2.4 billion).
The World Bank suggested that by eliminating these tax exemptions and including these sectors in the taxation system, Pakistan could generate additional revenue of up to 4pc of GDP, or around Rs 4 trillion ($24 billion). The bank also advocated for a more progressive taxation system based on land attributes such as size, location, and productivity.
The organization also recommended an overhaul of the income tax structure to ensure uniformity among all earners. This includes simplifying the personal income tax structure for both salaried and non-salaried individuals without reducing exemptions for salaried people. It also suggested reviewing subsidy expenditures and increasing the Federal Excise Duty on cigarettes.
The World Bank emphasized the need for an income tax structure that ensures progressivity based on updated analysis considering recent inflation and labor market changes, increased social protection expenditures, and higher taxation of high-income earners.
The bank proposed increasing land taxation to 2 pc of GDP by standardizing the three current valuation systems and raising property tax rates, particularly in large and growing peri-urban settlements outside municipal boundaries. It also called for closing regressive tax exemptions and adjusting property tax rates to match comparable countries.
Despite imposing some of the region's highest taxes on existing taxpayers, Pakistan's revenue collection remains low due to key sectors not paying their fair share. The World Bank advised that reductions in subsidies such as the Tariff Differential Subsidy could result in savings of up to Rs 167 billion ($1 billion), which would aid in debt alleviation.
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