THE IMF’s insistence that the government deliver on an earlier commitment to reform personal income taxes needs to be handled with care. The adverse impact on household incomes due to the government’s continued failure to rein in inflation through effective planning and proactive policymaking has of late been worsened by a global commodity price super-cycle which shows no sign of abating.
In such circumstances, to further squeeze households whose budgets are already stretched to breaking point would only add to the public’s miseries.
In response to the multifaceted economic challenges thrown up by the Covid-19 pandemic, we should have by now seen broad-based policies aimed at remedying some of the structural issues in Pakistan’s economy. The government should have prioritised plugging revenue leakages and meaningfully broadening the tax net to ensure that the taxation system remained equitable.
Instead, it turned to band-aid solutions like Ehsaas handouts and regressive fuel and electricity subsidies to ease inflation pains. Inexplicably, it also allowed tax dodgers ample chances to whiten their black money, first through no-questions-asked investments in real estate and, more recently, by allowing investments in the industrial sector.
The IMF, as part of the seventh review of its Extended Fund Facility, has now demanded that personal income tax rates be increased by the next budget to pad up the government’s kitty. It also wants the personal income tax regime reformed so that the government can squeeze as much out of this head as possible. According to well-placed sources who spoke to this paper, the reforms in question are likely to mean the reduction of income tax slabs from 12 to six, which will entail an increase in effective tax rates.
It is unclear at the moment how the government will structure the new slabs and rationalise the applicable taxes on each, but it must ensure that any increase in revenue collection through personal income taxes is done by increasing their progressivity — ie, by making the wealthy contribute a larger share, rather than imposing any additional burden on those already struggling to make ends meet.
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Given how perilously things are balanced at the moment in Pakistan’s political landscape, there isn’t much hope that the government, if it survives, or even its successor, will be in any position to undertake the politically painful, but much-needed reforms that can help successive governments avoid penalising captive taxpayers for their own incompetence in expanding the tax net.
Published in Dawn, March 24th, 2022