At a time when the economy is beset by political instability, the International Monetary Fund (IMF) has reaffirmed its demand that Islamabad make improvements to the personal income tax system (PIT).
Last week, an IMF staff team had a first round of talks with tax officials, raising the topic of PIT changes to maximize revenue, particularly from salary revenues. Last year, the government refused to accept the Fund’s demand.
These demands are part of the Extended Fund Facility’s (EFF) $7 billion seventh review. Following the sixth review, the government revoked tax exemptions totaling Rs. 343 billion, compared to the IMF’s demand of Rs. 700 billion.
According to a reliable source, the IMF has required that the salary income tax slabs be reduced from 12 to six, with rates increased, as part of the reforms. One of the prerequisites for consideration in the upcoming budget is demand.
According to one of the recommendations, the burden of tax payment would be reduced for individuals earning less than Rs. 600, 000 per year, but tax incidence would be increased for those earning more than Rs. 300, 000 per month.
At the same time, adjustments to the Provident Fund and other tax exemptions are being considered.
Pakistan has already given the Fund assurances that legislation on PIT will be enacted before the budget, allowing it to take effect on July 1.
The changes’ broad goals are to simplify the system, increase progressivity, and encourage labor formalization.
This will lower the number of tax rates and income tax brackets; it will also cut tax credits and allowances (save for those for the disabled and old people, as well as Zakat receipts); it will provide special tax processes for extremely tiny taxpayers; and it will bring in more taxpayers.
Furthermore, low-income families will be safeguarded. According to the IMF, these PIT changes will result in revenue increases of 0.3 percent of GDP in FY2024.
The administration has already committed to enacting legislation by the end of February 2022, according to the source. “We are dedicated to revamping our PIT,” the source said, adding that the measures include simplifying the PIT system by lowering the number of rates and income tax brackets (slabs) and increasing progress. Tax expenditures and exemptions will be reduced as well.
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