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In the capital city of Islamabad, the International Monetary Fund (IMF) has strongly advised Pakistan to decrease the number of tax slabs for both the salaried and business class, reducing the existing seven to four. This proposal, if accepted, is anticipated to negatively impact the middle and upper-middle-income groups.

Addressing the issue last week, the IMF aimed to more than double tax collection from business individuals and salaried persons, as reported by government sources.

The proposition originated from a technical mission of the IMF, which completed a comprehensive two-week review of Pakistan’s tax policies. The mission also proposed an elevation in the current reduced sales tax rates to the standard 18%, with exceptions for essential goods, according to insider sources.

While the IMF has not formally presented its recommendations in a report, the visiting mission shared its findings with the federal government before departing. It is expected that the IMF will soon release its draft report; however, the recommendations remain non-binding. Esther Perez, the IMF Resident Representative, did not respond to inquiries regarding the technical mission’s recommendation to reduce the number of personal income tax slabs.

There appears to be reluctance from tax authorities to embrace the IMF’s suggestion, citing the already substantial taxation burden on the salaried class. The IMF has previously advocated for increased tax contributions from the agriculture and real estate sectors.

Sources indicate that the IMF proposed reducing the number of tax slabs from seven to four. Currently, the salaried class faces income tax rates ranging from 2.5% to 35%, depending on annual income.

If the slabs are reduced, individuals in the lower and middle-income brackets may experience a significant surge in their tax rates.

In the fiscal year gone by, the Federal Board of Revenue (FBR) amassed Rs264 billion in income tax from the salaried class, with the majority contributed by those earning between Rs200,000 to Rs300,000 monthly.

FBR officials express concern that deleting two to three tax slabs could result in a notable increase in tax rates for individuals earning between Rs200,000 to Rs300,000.

Awaiting the technical report from the IMF’s mission, the current scenario includes 74 types of tax exemptions related to personal income and allowances, totaling Rs232 billion in the last fiscal year, as pet FBR report of expenditure.

For the upcoming fiscal year, the IMF projects a Rs11 trillion tax target, with an emphasis on collecting over Rs4.8 trillion through direct taxation. The FBR’s report outlines income tax exemptions of Rs22 billion for various institutions, foundations, societies, boards, trusts, and funds in 2022. Collective investment schemes and REIT schemes distributing over 90% of their incomes to certificate holders shareholders also enjoyed Rs21 billion in exemptions.

Interestingly, foreign government agencies and foreign nationals working in Pakistan received Rs30.2 billion in tax exemptions last year. Notably, employees of the IMF, World Bank, and Asian Development Bank are exempt from income taxes.

Two months prior, the World Bank suggested taxing the monthly salaried income of Rs50,000 but later withdrew the proposal, acknowledging double-digit inflation in the country.

A significant tax base, including unsalaried individuals and sole proprietors, including retailers, remains outside the income tax net.

Sources reveal that the IMF also proposed ending preferential sales tax rates administered under the 8th Schedule of the Sales Tax Act. This adjustment would elevate the sales tax rates on numerous goods to the standard 18%. The IMF recommended retaining reduced rates for sensitive goods, such as food products, according to insider sources.

According to the FBR’s Expenditure Report, the country suffered a loss of Rs130 billion last year due to reduced sales tax rates.

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