WB wants income tax slabs rationalised

ISLAMABAD: The World Bank (WB) has asked Pakistan to rationalize slabs of Personal Income Tax (PIT) for the salaried and non-salaried class, remove distortions in the GST regime and bring tobacco under a single premium rate of excise taxation.

The bank also recommends establishing a supra body for bringing all kinds of regulators under one centralized fold to improve coordination among the Center and provinces instead of dealing with it through a “piecemeal” approach.

According to the WB estimates shared with the participants of a conference titled “Immediate Reform Agenda - IMF and Beyond” organized by the WB and PIDE on Friday, the contribution of GST to the percentage of GDP stands at 2.7 percent and if all kinds of reduced tax rates, exemptions, and incentives are abolished, then the potential of GST as percentage of GDP could go up to 6.53 percent. If it translates into absolute tax collection of GST, it could be more than double.

The WB also recommended introducing a single premium rate of Federal Excise Duty (FED) on tobacco jacking it up from 0.19 percent of GDP to 1.09 percent of GDP clearly indicating that the tax collection could exceed Rs1000 billion.

Asked about the increased share of illicit tobacco, the WB’s economist said Indonesia’s model could be reviewed to replicate it in Pakistan and how they took measures to increase taxation.

On rationalization of taxation on Personal Income Tax (PIT), the banks asks for bringing changes apparently recommending reduction in the number of slabs for the salaried class from seven to four. However, when asked question, the WB high-ups did not give any answer.

The WB identified flaws in the existing fiscal arrangement under the NFC Award but when one of the participants asked whether the bank recommended bringing changes to it, there was no clear answer and the economist contended only as saying that it was the constitutional arrangement and they just raised the red flag to highlight that the existing fiscal arrangement was unsustainable.

Dr. Nadeem ul Haque, Vice Chancellor of the Pakistan Institute of Development Economics (PIDE), said the reform agenda must not focus only on tax, tax and only tax. He said Pakistanis were not tax cheaters.

He said colonial institutions were perpetuating their illegitimate rule through strange laws which basically did not allow the markets to function smoothly.

Dr. Haque’s comprehensive reform agenda addresses crucial sectors including regulatory modernization, tax reform, market liberalization, energy efficiency, and enhancements in agriculture and banking.

A key feature of reforms is the introduction of a ‘Regulatory Guillotine’ aimed at eliminating burdensome regulations that hinder business growth and innovation.

Speaking on “Reforms for a Brighter Future: Time to Decide,” Mathew Verghis, Regional Director of the World Bank Group (South Asia), said Pakistan’s economic model was unsustainable due to its reliance on borrowing to finance its fiscal and current account deficits, leading to a growing debt level, which had reached 80% of GDP.

He added that Pakistan’s spending exceeded its revenue, and it imported more than exports, resulting in increased domestic and external borrowing. However, he also noted that Pakistan had the potential for a brighter future, leveraging its youth, natural resources, and strategic location to achieve 7-8% annual GDP growth, and emphasized the need to prioritize reforms addressing the current economic crisis.

Dr. Durre Nayab, Joint Director PIDE, talked about “Public Administration for the 21st Century”.

She addressed critical inefficiencies in Pakistan’s governance system, proposing comprehensive reforms across various sectors including the cabinet, civil bureaucracy, judiciary, and local government.

The reforms aim to professionalize and streamline public administration by eliminating outdated practices, introducing competitive hiring processes, digitalizing operations, and enabling greater autonomy at the local government level.

Derek H.C. Chen, Senior Economist at the World Bank, outlined a comprehensive review of Pakistan’s federal tax system, aiming to enable a modern and efficient tax structure. It discusses the need for substantial reform due to Pakistan’s low revenue collection compared to the international standards and the complexities within the current tax system marked by numerous special provisions and concessional rates. Key recommendations include rationalizing concessions, enhancing tax policy and administration, and leveraging potential revenue from provincial sources. The chapter emphasizes the critical role of systematic and phased reforms to increase tax collection efficiency, support fiscal sustainability, and ensure equitable economic growth.