The World Bank has advised Pakistan to collect taxes from the agricultural and real estate sectors and combine the income thresholds for salaried and non-salaried individuals under a progressive Personal Income Tax (PIT) system. The World Bank suggests that if taxes on agriculture income and properties are properly enforced, Pakistan could generate about 3% of its GDP annually, which is roughly over Rs3 trillion.
The World Bank is also waiting for approval from its Executive Board to provide $350 million to Pakistan for RISE-II, but the date for the meeting is not confirmed yet. Currently, there’s an annual income threshold of Rs600,000 for salaried individuals that is exempt from taxation, while for non-salaried income, the exempted limit is Rs400,000 per year.
Pakistan faces a challenging fiscal deficit, and the World Bank recommends a combination of measures to increase revenue and reduce spending. Their suggestion is to tax the wealthier individuals while safeguarding the poorer ones. They propose simplifying Pakistan’s income tax system, including aligning it for both salaried and non-salaried individuals to ensure progressivity. Importantly, they do not recommend reducing the current income thresholds.
Previous analysis suggested lowering the exemption threshold for salaried individuals, but this would need updating to account for inflation and labor market changes to avoid impacting low-income earners. The World Bank emphasizes the need for new analysis on recent data to inform this reform.
The World Bank supports the idea of a similar income tax structure for both salaried and non-salaried individuals, but they recommend introducing this change gradually as part of a broader tax reform. The burden of taxation should fall more on those with higher incomes.
The World Bank’s comprehensive tax package and expenditure reforms aim to address Pakistan’s unsustainable fiscal deficits. They propose reducing subsidy spending, eliminating regressive tax exemptions, and increasing taxation on high-income earners, particularly in agriculture, property, and retail sectors. These reforms should make the tax system fairer and more progressive.
Regarding lowering the current income tax exemption threshold for salaried workers earning below the Rs50,000 monthly threshold, the World Bank explicitly states that they do not recommend any reduction in the current nominal threshold. Their main recommendation is to simplify Pakistan’s income tax system, ensuring that it’s fair for both salaried and non-salaried individuals while making it progressively taxing for higher-income individuals.
The FBR collected Rs1.6 trillion in income tax for the fiscal year 2021–2022. Only a small percentage of taxpayers—13,958 specifically—contributed 75% or Rs1.194 trillion of the entire income tax collection in FY22, according to an early report from the Reforms and Revenue Mobilization Commission. The 13,958 people represented only 0.005% of the overall population and 0.39% of return filers.
Only 28,027 individuals paid the full 80% of income tax, or Rs1.274 trillion. Similar to this, 57,454 people paid 85% of income tax, or Rs1.4 trillion, 126,908 taxpayers paid 90%, or Rs1.43 trillion, and 317,940 taxpayers paid 95%, or Rs1.5 trillion.
“The scenario appears to be much different from India. In Pakistan, only 3.5% of filers contributed 90% of income tax collection, compared to 22% of total filers who paid 90% of the tax in India, according to the commission’s findings.
“The scenario appears to be much different from India. In Pakistan, only 3.5% of filers contributed 90% of income tax collection, compared to 22% of total filers who paid 90% of the tax in India, according to the commission’s findings.
