Salary income tax brackets to be reduced to five

Salary income tax brackets to be reduced to five

KARACHI: The government is working on reducing the brackets of salary income tax to five from existing 11 besides reducing the income slabs, according to country report on Pakistan issued by International Monetary Fund (IMF) on Thursday.

Pakistan has assured the IMF to take major initiatives in the upcoming budget 2021/2022. According to the report the Pakistani authorities assured the IMF that in the next step of tax policy reform efforts and to further support fiscal objectives, the government will introduce both a general sales tax (GST) and a personal income tax (PIT) reform with the FY 2022 budget, yielding an estimated 1.1 percent of GDP.

The government may introduce change the existing tax rate structure by reducing the number of rates and income tax brackets from eleven to five and decreasing the size of the income slabs, with a view to simplifying the system and increasing progressivity.

The authorities further pledged to reduce tax credits and allowances by 50 percent (except for Zakat and those provided for disabled and senior citizens).

Besides, they also pledged to introduce a special tax procedure for very small taxpayers, aimed at preventing further tax base erosion and facilitating the formalization of the economy.

The authorities may adopt a long-term strategy to reduce labor informality and to bring additional taxpayers into the PIT net. This reform is expected to yield 0.4 percent of GDP on an annualized basis.

For the broadening and harmonizing the General Sales Tax (GST) base, the authorities assured the IMF through its Letter of Intent (LoI) signed by the finance minister and governor State Bank of Pakistan (SBP) that the government will advance the reforms to our GST system, underpinned by a unified tax base and within the confines of the current constitution.

The authorities pledged the following:

(i)  to eliminate all zero-rated goods (Fifth Schedule), except on export and capital machinery goods and move them to the standard sales tax rate;

(ii) remove reduced rates under the Eight Schedule and bring all those goods to the standard sales tax rate;

(iii) eliminate exemptions (Sixth Schedule) excluding a small subset of goods (i.e., basic food, medicines, live animals for human consumption, education and health-related goods) and bring all others to the standard rate; and

(iv) remove the Ninth Schedule to replace a specific tax rate for cell phones with the standard rate. These reforms are expected to yield an estimated 0.7 percent of GDP on an annualized basis.

Moreover, the government is also in the process of harmonizing the service sales tax across provincial jurisdictions, with support from the World Bank, expected to be completed by end-June 2021.

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