The International Monetary Fund (IMF) has urged Pakistan to reform its tax system, particularly focusing on rationalizing tax rates for individuals. The IMF proposes eliminating the distinction between salaried and non-salaried individuals and reducing the number of tax brackets to a maximum of four.

Under the IMF’s recommendations, the highest income tax rate of 35 percent would apply to individuals earning Rs. 333,000 per month. Additionally, the IMF suggests lowering the income thresholds for higher tax brackets and eliminating preferential tax treatments for specific sectors, such as tax credits for share investments and deductions for mortgage payments.

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Currently, Pakistan’s tax system features different bracket structures for salaried and non-salaried taxpayers. Salaried individuals face five tax brackets ranging from 2.5 percent to 35 percent, with the highest bracket starting at an annual income of Rs. 6 million. Non-salaried individuals, on the other hand, are subject to six tax brackets with rates up to 35 percent, starting at an annual income of Rs. 4 million.

The IMF notes significant geographic and taxpayer-type disparities in tax collection, with Punjab and Sindh provinces contributing the most. Interestingly, Associations of Persons (AOPs) in Sindh generate a substantial portion of tax revenue despite representing only a small fraction of tax filers.

The current tax structure poses challenges, including inequities between different types of taxpayers and potential incentives for individuals to categorize income as employment rather than business income due to preferential tax rates for salaried individuals.

In 2023, Pakistan reduced the number of tax brackets for salaried individuals from seven to five, but the IMF suggests further streamlining to four brackets. This would simplify the system and address discrepancies in tax rates based on income source.

The IMF emphasizes the need for a fair and efficient tax system that discourages tax planning activities aimed at reducing tax burdens. Reforming the tax regime, according to the IMF, will promote economic efficiency and equity by ensuring that all individuals contribute fairly based on their income, regardless of its source or nature.

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