World Bank Advises Pakistan to Expand Tax Net and Eliminate Exemptions
Addressing Pakistan’s Tax Collection and Fiscal Deficits
The World Bank (WB) has recently advised Pakistan to take measures to enhance its tax collection and address its unsustainable fiscal deficits. The bank’s recommendations, made public on Tuesday, emphasize the importance of expanding the tax base and removing tax exemptions. By incorporating incomes from agriculture, properties, and retail businesses into the effective tax net, Pakistan can make significant progress in this regard.
Untapped Potential and Revenue Generation
A recent World Bank report reveals that Pakistan currently faces a tax collection shortfall of approximately Rs 737 billion ($4.4 billion). The report highlights substantial amounts of untaxed wealth in sectors such as agriculture and real estate, with the latter being under-taxed by Rs 402 billion ($2.4 billion). By eliminating tax exemptions and including these sectors in the taxation system, Pakistan could potentially generate additional revenue of up to 4% of GDP, amounting to around Rs 4 trillion ($24 billion).
A Progressive Taxation System
The World Bank suggests implementing a more progressive taxation system based on land attributes such as size, location, and productivity. This approach would ensure fairness and equity among taxpayers. Additionally, the bank recommends simplifying the income tax structure, ensuring uniformity for both salaried and non-salaried individuals, while preserving exemptions for salaried individuals. It also suggests reviewing subsidy expenditures and increasing the Federal Excise Duty on cigarettes.
Ensuring Progressivity and Increased Taxation
The World Bank emphasizes the need for an income tax structure that ensures progressivity. This requires analyzing recent inflation and labor market changes, as well as increased social protection expenditures. It also calls for higher taxation of high-income earners. Furthermore, the bank proposes increasing land taxation to 2% of GDP by standardizing valuation systems, raising property tax rates, especially in large and growing peri-urban settlements, and aligning property tax rates with those of comparable countries.
Challenges and Potential Solutions
Pakistan’s revenue collection remains low due to key sectors not paying their fair share. The World Bank suggests reducing subsidies, such as the Tariff Differential Subsidy, which could result in savings of up to Rs 167 billion ($1 billion). These savings could contribute to debt alleviation and overall economic stability.
Conclusion
By implementing the World Bank’s recommendations, Pakistan has the potential to significantly improve its tax collection and reduce fiscal deficits. Expanding the tax base, eliminating exemptions, and introducing a progressive taxation system are crucial steps towards a more equitable and sustainable economic future.
