The World Bank has noted that political hesitation is a significant obstacle to Pakistan’s taxation efforts. The country has a history of low tax collection rates, which has constrained its ability to invest in infrastructure and social services. Despite some efforts, political resistance to tax reform has hindered progress. The World Bank suggests that Pakistan needs to address political obstacles to taxation if it is to increase revenue and sustain economic growth.
By Staff Reporter
ISLAMABAD: The World Bank (WB) has identified a significant gap of around 50 percent in General Sales Tax (GST) on traders in real VAT mode in Pakistan, which could be closed by eliminating exemptions on the registration threshold of Rs 50 million.
If this taxation scheme is implemented without any political considerations, it has the potential to bring millions of traders and retailers into the tax net.
In a bid to bolster dwindling tax revenues, the bank has proposed a series of measures for Pakistan.
However, the ruling Pakistan Muslim League (PML) Nawaz has been hesitant to impose taxes on traders, its key political constituency.
In fact, the former finance minister Miftah Ismail had proposed a fixed tax scheme for traders in the last budget, but the idea was scrapped when the party leader Maryam Nawaz forced him to withdraw it during the country’s International Monetary Fund’s bailout program.
According to the World Bank’s estimates, the current collection of GST is just 3.33 percent of Gross Domestic Product (GDP) based on data from FY 2019.
However, removing exemptions and the registration threshold could increase GST’s potential to a whopping 6.53 percent of GDP.
The bank’s recommendations for Pakistan include the removal of concessional rates on sales tax on goods by eliminating the 8th schedule of the sales tax act and applying the standard rate on all goods subject to reduced rates.
Additionally, the list of goods subject to zero-rating should be limited exclusively to exports, while domestically sold goods mentioned in the 5th schedule of the sales tax act should initially be moved to the exempt list under the 6th schedule before exemptions are rationalized.
The World Bank also suggests reducing the number of items included in the 6th schedule of the sales tax act, limiting exemptions only to those considered basic food, basic public health services, and selected financial transactions.
Furthermore, Income tax reform is necessary, including merging the tax schedules for salaried and non-salaried taxpayers, reducing the tax-free threshold, and simplifying the structure of the personal income tax.
There is also a need to reduce import duty exemptions, which are distortionary and provide limited economic benefits while imposing high fiscal costs.
The World Bank calls for the removal of import duty exemptions for non-exporters under the 5th schedule of the tariff code.
Finally, increasing, improving, or implementing new taxes on property and agriculture is essential for the provinces to meet devolved expenditure responsibilities, reducing the burden on the government.
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