IMF’s Critical Tax Requirement Likely to Create Problems for New Govt in The Upcoming Budget

The new government is facing the biggest challenge of implementing the personal income tax (PIT) legislation in the coming budget (2022-23).

Sources told ProPakistani that it is a critical structural benchmark agreed with the International Monetary Fund (IMF) to enforce PIT reforms by July 1, 2022.

However, the Federal Board of Revenue (FBR) has made 2-3 different drafts on the proposed slabs for the salaried class. The revised slabs were not approved by the former Finance Minister Shaukat Tarin due to the political situation. One of the options available to the new government is to delay the PIT reforms for another year. The reforms would not be implemented in the coming budget. But this has to be agreed upon with the fund team of the IMF.

On February 15, 2022, former Finance Minister Shaukat Tarin said the government would hold negotiations with the International Monetary Fund (IMF) on its “wishlist” of reforms in the Personal Income Tax (PIT), withdrawal of exemptions under the PIT, and changes in the existing income tax slabs.

He was responding to a query on the status of the IMF structural benchmark of preparation of draft PIT legislation by end-February 2022 on the conclusion of the second Computerized Draw on POS Prize Scheme held at the FBR Headquarters on February 15.

“We negotiated hard with the IMF in the past and it would be done again as the wishlist cannot be implemented in totality,” the former finance minister had said.

According to the IMF’s last report of Feb 2022, Pakistani authorities are in the process of drafting PIT legislation by end-February 2022 to ensure it will be ready to come into effect on July 1, 2022, with the fiscal year 2023 budget. Aiming at simplifying the system, increasing progressivity, and supporting labor formalization, it will:

  1. reduce both the number of rates and income tax brackets;
  2. reduce tax credits and allowances (except those for disabled and senior citizens, and Zakat receipts);
  3. introduce special tax procedures for very small taxpayers, and
  4. bring additional taxpayers into the tax net. Low-income households will remain protected as the reform preserves the current PIT threshold (almost 3 times income per capita).

“Personal income tax (PIT) reform: We (Pakistani authorities) are committed to reforming our PIT to change the existing tax rate structure by reducing the number of rates and income tax brackets (slabs) to simplify the PIT system and increase progressivity. It will also reduce tax expenditures and allowances. To support the reform, we will prepare the draft legislation by end-February 2022 to ensure that it will be ready to come into effect on July 1, 2022, with the FY 2023 budget. These PIT reforms will yield an estimated 0.3 percent of GDP in revenue gains in FY 2024. Low-income households will be protected as the reform preserves the current PIT threshold (almost 3 times income per capita)”, the report noted.



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