File photo. Sanjay Kanojia—AFP
The World Bank on Monday urged Pakistan to eliminate all tax exemptions and bring into the tax net incomes from agriculture, real estate and retailers, stressing this can generate revenue of up to 4 percent of GDP in the short-term.
Addressing a media briefing in Islamabad, World Bank Country Director Najy Benhassine and senior economist Tobias Haque noted that people involved in the real estate and agriculture sectors had the largest proportion of untaxed wealth. They said collecting this revenue was the responsibility of provincial governments, who could use it to improve services and reduce the financial burden on the center.
According to Haque, real estate and agriculture should yield revenues of 2 and 1 percent, respectively, of the GDP, or roughly Rs. 2.1 trillion and Rs. 1 trillion, respectively. He said the global lender had submitted a detailed policy paper in this regard to the government, outlining how revenues could be increased through improved, expanded and progressive agriculture income taxation. To achieve this, he said, the government must immediately “reduce or refine” current threshold of 12.5 acres for tax exemption.
Additionally, he said, agricultural land should be appropriately categorized on the basis of size, location, irrigation status and area-based productivity to ensure accurate tax rates. Provincial governments, he claimed, could “immediately” increase land taxation to 2% of GDP by ensuring reliable land ownership records; harmonizing the existing three valuation systems; and increasing property tax rates to match those of comparable countries. Governments, he said, also needed to consider peri-urban settlements and ensure they were subject to appropriate land taxation.
The policy paper submitted to the government by the World Bank notes that Pakistan’s revenue collection remains among the lowest in the region, even as tax rates on existing taxpayers remain among the highest. Pakistan’s total revenue collection averaged 12.8% of GDP in the past decade, it states, compared to the South Asian average of 19.2%.
Referring to the World Bank’s advice for Pakistan, Haque said it had primarily concerned broadening the tax base; reducing the tax-free threshold; and simplifying the structure of the personal income tax. However, he clarified, it did not advocate lowering income tax exemption for salaried people to Rs. 50,000 per month.
On simplifying the personal income tax structure, he said it should be aligned for both salaried and non-salaried individuals. He further said the exemption limit should be determined in light of recent inflation and labor market changes to ensure low incomes are not adversely impacted. “Reforms should include reducing subsidy expenditures, closing regressive tax exemptions, and increasing taxation of high-income earners, including via improved taxation of agriculture, property, and retail sectors,” it said, adding these reforms should “increase progressivity” of the system.
“Pakistan is in a very difficult situation as its fiscal deficit is unsustainable. There is a need to undertake a combination of measures to generate revenues and reduce expenditures. We are recommending to tax rich and wealthy while protecting the poor,” Haque emphasized.