IMF proposes overhaul of Pakistan’s tax system to increase revenue

International Monetary Fund proposes equal tax for all, fewer slabs, and no pension exemptions

The International Monetary Fund (IMF) has recommended significant changes to Pakistan’s tax regime, advising the Federal Board of Revenue (FBR) to enhance revenue by restructuring the personal income tax (PIT) framework.

The IMF’s suggestions include equalizing the tax treatment for both salaried and non-salaried individuals, reducing the current seven tax slabs to four, and revoking tax exemptions on private employer contributions to pensions.

According to IMF projections, the full adoption of these recommendations could generate an additional 0.5% of GDP in revenue, translating to about Rs500 billion annually.

In the ongoing fiscal year, the FBR has collected Rs215 billion from the salaried class during the first eight months, with expectations to reach Rs300 billion by year-end.

The implementation of the IMF’s proposals is estimated to substantially increase this figure by Rs500 billion from both salaried and non-salaried sectors.

FBR officials have acknowledged the potential for revenue growth through the elimination of exemptions and preferential tax treatments.

The IMF advises a simplification of tax rates into a single, progressive structure, emphasizing the need for a more rational tax system by eliminating the distinction between salaried and non-salaried individuals and advocating for a maximum of four tax slabs.

Currently, the tax system’s progressivity is under scrutiny, with experts warning that reducing slabs could necessitate higher taxes for incomes over Rs2 million, a significant shift from the current maximum rate applied to incomes exceeding Rs6 million.

Additionally, the IMF has called for a review of the Second Schedule and Chapter III of the Income Tax Ordinance (ITO) to abolish preferential treatments and deductions that benefit specific employee sectors, investments in shares, mortgage payments, and contributions to education and research.

The organization also suggests reconsidering the tax exemption threshold and the taxation of pension contributions or benefits to further increase tax revenues.

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