Contrary to the International Monetary Fund’s (IMF) recommendation to increase tax rates in the next budget to collect an additional Rs2 trillion, Pakistan’s renowned local experts have unveiled a comprehensive package aimed at generating Rs1.2 trillion more by reducing income tax rates while withdrawing certain exemptions. This move is part of a broader strategy to bolster the country’s revenue without stifling economic growth or burdening businesses and individuals.
A consortium of notable Pakistani tax experts and economists has prepared a package of tax reforms promising higher revenues while avoiding the economic pitfalls associated with high taxation. They assert that their proposed reforms could result in a net gain of Rs4.1 trillion over three years, equivalent to one-fourth of the 2022 tax base, without damaging the economy. This includes Rs1.2 trillion in gains in the first year from all four taxes. Dr. Nadeemul Haq, Vice Chancellor of the Pakistan Institute of Development Economics (PIDE), criticized the prime minister’s decision to hire foreign advisors, advocating for a “home-grown package” instead.
The IMF has set forth conditions requiring Pakistan to impose additional taxes equal to Rs2 trillion to achieve an annual tax target of Rs13 trillion in the next fiscal year. This additional collection is expected to come from increasing the tax burden on salaried and non-salaried individuals and withdrawing sales tax exemptions.
The local experts, working under the consortium of PIDE and the Policy Research Institute of Market Economy (PRIME) Tax Reforms Commission, have included prominent figures like former central bank governor Shahid Kardar, former IMF official Dr. Nadeemul Haq, noted tax experts Dr. Ikramul Haq and Syed Shabbar Zaidi, and former WTO official Dr. Manzoor Ahmad. They aim to provide a locally crafted solution as opposed to the external recommendations from the IMF and UK policy advisor Stefan Dercon.
Income Tax Reforms
The local experts propose that the government should charge the same rate of tax regardless of the source of income, advocating for the removal of exemptions on agricultural income, including rental income on agriculture, through a constitutional amendment. This would make “income” a federal subject without any exemptions. They suggest uniformity in the tax regime for all sources of personal and non-corporate incomes, a proposal aligned with the IMF’s condition to tax all incomes regardless of their source.
However, in contrast to the IMF’s condition to increase the tax burden on individuals by raising their tax rate to a record 45%, the local experts suggest reducing the tax burden. They propose increasing the taxable income threshold from Rs600,000 to Rs800,000 and reviewing it periodically. For an income of Rs200,000, they propose a 5% tax, and for a monthly income of Rs400,000, the proposed rate is 12.5%, significantly lower than the IMF’s recommendation. For a monthly income of Rs800,000, the local experts propose a 20% rate, while the IMF suggests a 45% income tax rate on a Rs467,000 monthly income. They also recommend a 35% tax rate on a monthly income of over Rs2.5 million.
The experts believe that the effective tax rates for personal income should be 5 percentage points higher than the corporate income tax rate. Under the current marginal tax slabs, the effective income tax rate for higher incomes is lower than the corporate tax rate, which incentivizes businesses to remain unincorporated. To address this, they propose decreasing the corporate tax rate from 29% to 25%.
Another major recommendation includes the withdrawal of the deemed rental income tax, Capital Value Tax, 10% super tax, and 1.2% turnover tax. They also call for an end to presumptive and final tax regimes, the restoration of investment credits for plant and machinery, and the reduction of withholding taxes, proposing a complete rollback of the withholding tax regime except on payroll, interest, dividends, and payments to non-residents.
Currently, 68% of revenue is collected through withholding and minimum tax regimes, leading to inefficiencies and compliance challenges, noted Ali Salman, Head of PRIME. The experts also demand an end to the non-filer category, which has been used to collect taxes instead of expanding the narrow tax base.
Despite these reforms, the local experts claim that the Federal Board of Revenue (FBR) will still achieve a Rs1.6 trillion net increase in income taxes over three years, including Rs246 billion in the first year. This includes a hypothetical Rs566 billion gain from businesses investing out of the savings from the reduction of tax rates and a Rs346 billion income tax gain from mandatory return filing and sales tax reforms.
Customs Reforms
Dr. Haq emphasized that Pakistan must adopt openness and abolish the policy of ad-hoc increases in regulatory and custom duties to meet budget targets. The experts propose abolishing regulatory duties, additional custom duties, withholding income tax, and sales tax on imports of capital goods and industrial inputs. Eliminating exemptions and concessions will increase customs revenue, though withdrawing regulatory and additional custom duties on imports will reduce customs revenue.
Despite potentially losing Rs596 billion in three years, the FBR will gain a net Rs314 billion due to the withdrawal of exemptions and recovering the true taxes in line with what the law requires. They also suggest declaring zero-rated import of plant and machinery, industrial raw materials, and intermediate goods, and withdrawing regulatory and additional custom duties and withholding income tax on imports.
Compared to the world average of 5%, import taxes in Pakistan constitute 46%.
General Sales Tax Reforms
The local experts back the IMF’s demand to end sales tax exemptions on GST except in areas such as education and health. “Pakistan has no clear tax policy—only measures sporadically introduced on an ad-hoc basis creating uncertainty and lack of trust,” said Dr. Haq.
The local experts believe that with GST reforms, Rs2.6 trillion can be collected, including Rs790 billion in the first year. Shifting from the current GST regime with high rates of 17% to 19% to a complete value-added tax through point-of-sale integration with a low rate of 7% to 10% will positively impact GST collection, noted Ali Salman.
