The World Bank on Monday termed increase in taxes on the wealthier agriculture and property sectors its highest priority and said salaried persons were already paying taxes closer to their maximum potential.

The highest priority areas for increasing tax collection were the agriculture and property sectors where there was a lot of wealth, said Tobias Haque, lead economist of the World Bank for Pakistan.

Haque spoke to a group of people along with the lender’s Pakistan chapter head Najy Benhassine.

The World Bank termed withdrawing tax exemptions, mainly in the sales tax area, part of its top priorities.

Pakistan could generate revenues equal to 3% of gross domestic product (GDP) by tapping the full potential of agriculture and property sectors, said the lead economist.

At this year’s projected GDP size, Pakistan can generate over Rs3 trillion by just plugging loopholes in the agriculture and property sectors.

The World Bank’s estimates suggest that by increasing taxes on land and property Pakistan can collect 2% of GDP in revenue and another 1% from the agriculture sector. Tobias said that it was the responsibility of provincial governments to tax land and agriculture income.

Last month, in its policy notes for Pakistan, the World Bank proposed measures for immediately increasing the tax-to-GDP ratio by 5% and cutting expenditures by about 2.7% of GDP aimed at putting the unsustainable economy back on a prudent fiscal path.

To collect 2% of GDP in taxes from land and real estate, the bank has proposed harmonisation of three different valuation systems, increase in property tax rates and change in land classification for taxation purposes.

At present, there is an actual market price of a plot, then a deputy collector valuation to pay provincial tax and then the FBR valuation to pay federal taxes.

Pakistan’s tax system is designed for revenue extraction, not for revenue mobilisation, said Sajid Amin, an economist working with the Sustainable Development Policy Institute (SDPI).

Pakistan was in a very difficult situation and it had to go for fiscal consolidation through a combination of revenue measures and expenditure rationalisation, said Tobias.

All Pakistanis were paying for fiscal deficit through inflation, said Tobias, while speaking at a policy dialogue arranged by Tabadlab, a policy think tank.

The lender has proposed reducing distortive exemptions to generate taxes equal to 2% of GDP.

“Personal income tax reforms are not the priority of the World Bank,” said Tobias while explaining the lender’s view about its recent controversial recommendation about imposing taxes on income below Rs50,000 per month.

Tobias admitted that there was very little potential left for increasing revenues from the salaried class, as it was already close to its maximum level.

The World Bank on Saturday clarified its position on the highly controversial recommendation of imposing taxes on income below Rs50,000 per month. The Washington-based lender stated that its recommendation was based on 2019 data, which needed to be updated in light of recent inflation and labour market conditions.

Although not a priority area, the bank said that personal income tax reforms should be done in a manner that protected the poor people.

The World Bank said that it in no way wanted Pakistan to tax people earning below Rs50,000 a month. The online version of the Pakistan Development Update report has been amended accordingly, said Tobias.

The bank released the report last week, which mentioned that the tax exemption threshold should be lowered.

“The World Bank certainly does not recommend any reduction in the current nominal threshold, and how it was framed above may have indeed been misleading,” said the bank.

Tobias said that there was a need to conduct a fresh household income survey and labour force survey before determining any new tax-free income level.

Pakistan’s tax system is highly distortive, which puts burden on very few taxpayers while others enjoy tax-free status.

In tax year 2021-22, the FBR collected Rs1.6 trillion in income tax. An interim report of the Reforms and Revenue Mobilisation Commission has recently revealed “only a small fraction of taxpayers, 13,958 to be exact, contributed 75% or Rs1.194 trillion of total income tax collection in FY22. The 13,958 individuals were equal to 0.39% of return filers and only 0.005% of total population.”

Just 28,027 taxpayers paid 80%, or Rs1.274 trillion, of income tax. Similarly, 85% of income tax, or Rs1.4 trillion, was paid by 57,454 taxpayers while 90%, or Rs1.43 trillion, was paid by 126,908 taxpayers and 95%, or Rs1.5 trillion, was paid by 317,940 individuals.

“When compared to India, the situation seems to be drastically different. In India, 90% of tax was paid by 22% of total filers, whereas in Pakistan, only 3.5% of filers contributed 90% of income tax collection,” said the commission’s report.

Published in The Express Tribune, October 10^th, 2023.

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