The adverse impact on household incomes due to the government’s continued failure to rein in inflation through effective planning and proactive policymaking has of late been worsened by a global commodity price super-cycle which shows no sign of abating.
In such circumstances, to further squeeze households whose budgets are already stretched to breaking point would only add to the public’s miseries.
At a time when the economy is grappling with political uncertainty, the International Monetary Fund (IMF) reiterated its earlier demand asking Islamabad for changes in personal income tax (PIT).
A staff mission of the IMF held a first round of discussions with tax officials last week and raised the issue of reforms in the PIT to raise maximum revenue, especially from salary incomes.Last year, the government did not accept the same demand of the Fund.
These demands are part of the seventh review of the $6 billion of the Fund Extended Fund Facility (EFF). In the wake of the sixth review, the government withdrew tax exemptions worth Rs343bn as against the IMF demand of Rs700bn.
A well-placed source told hat as part of the reforms, the IMF has demanded to reduce the salary income tax slabs from the existing 12 to six with an increase in the rates. The demand is one of the conditions for consideration in the next budget.
As per one of the proposals the burden of tax payment would be decreased on lower-income ceiling earning Rs600,000 per annum, while tax incidence would be increased on those who are earning over Rs300,000 per month basis.At the same time, it is also proposed to bring reforms in Provident Fund and other allowances for taxation.
Pakistan has already held out an assurance to the Fund to make legislation about PIT before the budget to ensure that it will be ready to come into effect from July 1.
The broader contours of the reforms are at simplifying the system, increasing progressivity, and supporting labor formalization.
This will reduce both the number of rates and income tax brackets; reduce tax credits and allowances (except those for disabled and senior citizens, and Zakat receipts); introduce special tax procedures for very small taxpayers; and bring additional taxpayers into the tax net.
Moreover, the low-income households will remain protected. The IMF estimates that these PIT reforms will yield an estimated 0.3 per cent of GDP in revenue gains in FY2024. According to the source, the government has already committed to making the legislation by the end of February 2022. “It is unclear at the moment how the government will structure the new slabs and rationalise the applicable taxes on each, but it must ensure that any increase in revenue collection through personal income taxes is done by increasing their progressivity — ie, by making the wealthy contribute a larger share, rather than imposing any additional burden on those already struggling to make ends meet.
