KARACHI: World Bank’s Lead Country Economist Tobias Haque said on Monday Pakis­tanis shouldn’t “get distracted” by the global lender’s recent recommendation about reducing the threshold of Rs50,000 monthly taxable income.

The World Bank retracted its income tax recommendation after taking widespread flak in the press.

“This one line… was part of one recommendation of a report that included 50 recommendations,” he said while taking part in an online policy roundtable on Pakistan’s fiscal crisis organised by Tabadlab, a think-tank based in Islamabad.

In response to the assertion by an earlier speaker who insisted that the salaried class is disproportionately footing the bill for the country’s fiscal imbalance, Mr Haque said “all Pakistanis” are paying a huge price in the form of inflation. The government is borrowing from commercial banks to bridge its fiscal deficit, he said, while the central bank is lending to commercial banks. It’s causing an increase in the amount of money in the system, which is pushing up prices, he noted.

Data shows salaried people paying more for others’ tax avoidance

Economic journalist Shahbaz Rana made a strong case for lowering the tax burden on the salaried class, saying it paid as much as Rs264 billion in taxes last year, equal to 12.1 per cent of the total income tax paid by all Pakistanis.

In contrast, textile exporters who sold goods worth $28bn overseas in the last fiscal year paid only Rs74bn in income tax. Retailers, another influential class of taxpayers, paid just Rs15bn in the same year, he said while highlighting the disproportionate tax burden on the salaried class.

Mr Rana said the imbalance between the tax contributions from the salaried class and the rest has become worse in the first quarter of the ongoing fiscal year.

People drawing salaries paid Rs71bn in the latest quarter par­tly because the last government imp­o­sed a higher tax burden on those earning more than Rs200,000 a month. Moreover, the highest tax rate of 35pc was imposed on a monthly income of Rs500,000 or more as opposed to the earlier threshold of Rs1 million.

These measures have resulted in a 33pc increase in the tax contributions by the salaried class in the current fiscal year so far. Meanwhile, exporters who sold goods worth Rs2tr or $7bn in the first quarter paid only Rs21bn in taxes, he said, adding that their share of income tax contribution came down to 3.6pc from 4pc a year ago.

Speaking on the occasion, Institute of Administrative Sciences Professor Sobia Khurram said the focus of tax reforms should be big-ticket items like agriculture, land and property. The current tax-to-GDP ratio of 10.4pc has the potential of another 2pc and 1pc through land and agriculture tax reforms, respectively. However, reforming personal tax offers a potential upside of only 0.1pc of GDP, she said.

Tabadlab Director for Policy Impact Samia Liaquat said food is becoming unaffordable as its prices have gone up about 40pc in rural areas in a year.

She also pointed out the need for expanding the social welfare programme from 9m households to 15m households. She highlighted that the national poverty line — Rs6,600 per person per month — equates to roughly Rs40,000 monthly household income for a six-member family. However, that level of monthly earnings differs from the global poverty line of $3.75 per person per day, which translates to Rs200,000 a month for a six-member household.

Sustainable Development Policy Institute Deputy Executive Director Sajid Amin said the tax system in Pakistan is designed for revenue extraction, not generation or mobilisation.

The highest number of IMF loan conditions pertain to revenue maximisation, he said, adding that it’s become an indicator of economic success as to who raises how much revenue. “That’s a false indicator. But all the tax system is geared towards meeting that shallow target,” he said.

Published in Dawn, October 10th, 2023