The World Bank (WB) has urged Pakistan to increase revenues through improved, expanded and progressive taxation.
The bank has presented a set of critical recommendations for Pakistan’s tax reform, with a specific focus on generating revenue through the taxation of agriculture and real estate.
Key Points
- Tax agriculture, real estate and retail sector to generate revenue.
- Equal taxation for salaried and non-salaried
- Adjust tax thresholds based on data.
- Rationalize property tax, improve land records.
- Address low revenue collection, fiscal deficits.
- Holistic reforms: subsidies, exemptions, high-income taxation.
- Protect vulnerable through social expenditures.
- Pakistan’s revenue collection is among the lowest in the region and tax rates on existing taxpayers among the highest.
Urgent Tax Reforms needed
In a detailed briefing to journalists, the WB’s lead country economist, Tobias Haque, stressed the pressing need to boost revenue by increasing taxation of various income sources, particularly targeting affluent individuals who derive income from agriculture and property.
Equal Taxation for All
The WB supports the idea of applying the same income tax structure to both salaried and non-salaried individuals. However, it advises a gradual introduction of this change as part of broader tax reform efforts, ensuring a fair distribution of the tax burden.
Addressing Tax Thresholds
Rather than specifying new income tax thresholds, the WB suggests that these should be determined based on recent survey data. The primary goal is to safeguard lower-income individuals while creating a more progressive tax system that places a heavier burden on higher-income groups.
Taxation of Agriculture, Real Estate, and Retail
The WB has called on Pakistan to eliminate all tax exemptions and incorporate incomes from agriculture, real estate, and retail businesses into the tax net. This move has the potential to yield an additional revenue of up to 4% of GDP (approximately Rs 4 trillion) in the short term.
Unlocking Revenue Potential
Agriculture and real estate are highlighted as significant contributors to Pakistan’s revenue. The WB has submitted a comprehensive policy paper proposing progressive agriculture income taxation. This includes immediate adjustments to the tax exemption threshold, land categorization for tax rates, and improved land ownership records.
Rationalizing Property Tax
The World Bank advocates harmonizing property tax rates and establishing a robust legal framework to ensure effective land taxation, especially for peri-urban settlements.Revenue ChallengesPakistan’s low revenue collection, compared to regional averages, is underscored, with total revenue collection averaging 12.8% of GDP over the past decade.
Holistic Reforms
To address unsustainable fiscal deficits, the WB emphasizes the need for a comprehensive package of tax and expenditure reforms. This entails reducing subsidy expenditures, removing regressive tax exemptions, and increasing taxation of high-income individuals.
Protecting the Vulnerable
Throughout the reform process, special attention must be paid to safeguarding the interests of lower-income individuals, including through enhanced social protection expenditures.The World Bank’s recommendations seek to reshape Pakistan’s tax landscape, enhancing revenue generation while ensuring a fair and equitable tax system. These proposals align with broader economic objectives, fostering fiscal stability and economic growth.