Commitment with IMF: Rs160 bn tax to be slapped on salaried class

ISLAMABAD: Pakistan has made a commitment with the IMF to draft Personal Income Tax (PIT) legislation till the end of the ongoing month (February 2022) for slapping approximately Rs160 billion tax on the salaried class by jacking up tax rates and reducing the number of slabs.

This PIT will be announced in the budget for 2022-23 and will become effective from July 1, 2022. The government also made commitment in writing with the IMF that parliamentary approval will be sought on new State Owned Enterprises (SOEs) in line with staff recommendations by end-June 2022.

The government is also committed with the IMF for issuance of regulations by the Public Procurement Regulatory Authority to require collection for publication of beneficial ownership information from companies which are awarded public procurement contracts for Rs 50 million and above till end March 2022. According to the staff report released by the IMF from its headquarters on Friday stating that Pakistani authorities are in the process of drafting PIT legislation by end February 2022 (new end-February 2022 structural benchmark) to ensure it will be ready to come into effect on July 1, 2022 with the FY 2023 budget.

Aiming at simplifying the system, increasing progressivity, and supporting labor formalization, it will: (i) reduce both the number of rates and income tax brackets; (ii) reduce tax credits and allowances (except those for disabled and senior citizens, and Zakat receipts); (iii) introduce special tax procedures for very small taxpayers; and (iv) bring additional taxpayers into the tax net. Low-income households will remain protected as the reform preserves the current PIT threshold (almost 3 times income per capita).

GST base harmonization: This will be critical to improve competitiveness and the business environment. Under the current system, the sales tax base is fragmented, with services subject to provincial taxation and goods under federal government taxation. The fragmentation of the tax base has severely compromised tax policy design and administration, generated disagreements over tax base definition and crediting, caused cascading and double taxation for businesses, and significantly increased compliance costs. Indeed, the system is cumbersome and harms competitiveness by increasing the cost of doing business.

The IMF staff assessed that risks continue to be tilted to the downside, both on the domestic and external front. The outlook for growth, trade, and remittances remains clouded amid the ongoing COVID-19 pandemic, especially at the global level, while inflation may rise further than expected as commodity prices feed through to domestic prices. In addition, political tensions over reforms could weaken policy implementation, and undermine Pakistan’s adjustment path, debt sustainability, and growth potential.

Moreover, reform fatigue and the political cycle could quickly narrow the window to undertake critical reforms. Tapering, geopolitical tensions, and waning reform efforts could affect external financing conditions. Close program monitoring, interlinked TA, and financing assurances from key lenders somewhat mitigate those risks.