Contrary to the International Monetary Fund’s (IMF) recommendation to increase tax rates in the next budget to collect an additional Rs2 trillion, Pakistan’s renowned local experts on Monday unveiled a package that proposes generating Rs1.2 trillion more by reducing income tax rates while withdrawing some exemptions.

A consortium of notable Pakistani tax experts and economists has prepared a package of tax reforms promising higher revenues without suffocating economic growth, businesses, and individuals.

These experts claim their proposed reforms would result in a net gain of Rs4.1 trillion over three years, equivalent to one-fourth of the 2022 tax base, without damaging the economy. This includes Rs1.2 trillion in gains in the first year from all four taxes. “The government should listen to its own people instead of hiring foreign advisors for preparing a ‘home-grown package,’” said Dr Nadeemul Haq, Vice Chancellor of the Pakistan Institute of Development Economics (PIDE), while criticising the prime minister’s decision to import experts from the United Kingdom to make a local plan.

The IMF has handed over a set of conditions to Pakistan that requires the imposition of additional taxes equal to Rs2 trillion to achieve the annual tax target of Rs13 trillion in the next fiscal year. The additional collection is sought by the IMF through increasing the tax burden on salaried and non-salaried individuals and withdrawing sales tax exemptions.

The local experts have made their efforts under the consortium of PIDE and the Policy Research Institute of Market Economy (PRIME) Tax Reforms Commission. The group includes heavyweights like former central bank governor Shahid Kardar, former IMF official Dr Nadeemul Haq, noted tax experts Dr Ikramul Haq and Syed Shabbar Zaidi, and former WTO official Dr Manzoor Ahmad.

These intellectually powerful individuals have tried to offer a locally made solution compared to the imported recipes from the IMF and the UK’s policy advisor Stefan Dercon.

Income Tax

The local experts propose that the government charge the same rate of tax regardless of the source of income. They suggest removing the exemption on agricultural income, including rental income on agriculture, through a constitutional amendment, thus making “income” a federal subject without any exemption. They advocate for uniformity in the tax regime for all sources of personal and non-corporate incomes—a proposal also part of the IMF’s condition to tax all incomes regardless of the source.

However, contrary to the IMF’s condition to increase the tax burden on individuals by raising their tax rate to a record 45%, the local experts suggest reducing the tax burden. They propose increasing the taxable income threshold from Rs600,000 to Rs800,000 and reviewing it periodically. For an income of Rs200,000, they propose a 5% tax, and for a monthly income of Rs400,000, the proposed rate is 12.5%, significantly lower than what the IMF is asking for.

For a monthly income of Rs800,000, the local experts propose a 20% rate, while the IMF wants a 45% income tax rate on Rs467,000 monthly income. They suggest a 35% tax rate on a monthly income of over Rs2.5 million. However, they believe the effective tax rates for personal income should be 5 percentage points higher than the corporate income tax rate.

The effective income tax rate under the current marginal tax slabs for higher incomes is lower than the corporate tax rate, incentivising businesses to remain unincorporated. The local economists demand that the corporate tax rate be decreased from 29% to 25%.

Another major recommendation includes the withdrawal of deemed rental income tax, Capital Value Tax, 10% super tax, 1.2% turnover tax, and an end to presumptive and final tax regimes. They call for the restoration of investment credits for plant and machinery and the reduction in the number of withholding taxes, proposing a complete rollback of the withholding tax regime except on payroll, interest, dividends, and payments to non-residents.

Approximately 68% of revenue is collected through withholding and minimum tax regimes, leading to inefficiencies and compliance challenges, said Ali Salman, Head of PRIME. The experts also demand an end to the non-filer category, which has been used to collect taxes instead of expanding the narrow tax base.

Despite these reforms, the local experts claim that the Federal Board of Revenue (FBR) will still achieve a Rs1.6 trillion net increase in income taxes over three years, including Rs246 billion in the first year. This includes a hypothetical Rs566 billion gain from businesses investing out of the savings from the reduction of tax rates and a Rs346 billion income tax gain from mandatory return filing and sales tax reforms.

Customs

Pakistan must adopt openness and abolish the policy of ad-hoc increases in regulatory and custom duties to meet budget targets, said Dr Haq. The experts propose abolishing regulatory duties, additional custom duties, withholding income tax, and sales tax on imports of capital goods and industrial inputs. The report states that eliminating exemptions and concessions will increase customs revenue. However, withdrawing regulatory and additional custom duties on imports will reduce customs revenue.

Despite potentially losing Rs596 billion in three years, the FBR will gain a net Rs314 billion due to the withdrawal of exemptions and recovering the true taxes in line with what the law requires, according to the report. They also suggest declaring zero-rated import of plant and machinery, industrial raw materials, and intermediate goods, and withdrawing regulatory and additional custom duties and withholding income tax on imports.

Compared to the world average of 5%, import taxes in Pakistan constitute 46%.

General Sales Tax

The local experts back the IMF’s demand to end sales tax exemptions on GST except in areas such as education and health. “Pakistan has no clear tax policy—only measures sporadically introduced on an ad-hoc basis creating uncertainty and lack of trust,” said Dr Haq.

The local experts believe that with GST reforms, Rs2.6 trillion can be collected, including Rs790 billion in the first year. Shifting from the current GST regime with high rates of 17% to 19% to a complete value-added tax through point-of-sale integration with a low rate of 7% to 10% will positively impact GST collection, said Ali Salman.