Pakistan has been asked by the World Bank to raise, enhance, or enact new property and agricultural taxes.
The bank suggested changes to the farm tax and stronger property tax collection in its study, “Pakistan Development Update: Restoring Fiscal Responsibility.”
In terms of tax reforms for agriculture, the lender advised lowering or changing the 12 12-acre tax exemption threshold in order to include more agricultural land in the tax system.
The Bank also wants Pakistan to make sure that land is properly classified for tax rates, taking into account its size, location, and irrigation status (simulations of an acreage-based tax suggested a potential to generate additional provincial revenues of about 1% of GDP). This applies to agricultural land utilized for non-agricultural purposes as well, which creates the potential for tax arbitrage even if it is still taxed under the agriculture income tax system.
Read More: World Bank Unhappy With Pakistan’s Sales Tax System
The lender suggested the following to improve tax collection in the real estate sector:
- In Punjab, for instance, the UIPT rate is now set at 5% of the yearly rental value, which translates into a capital value-based tax rate of 0.7% per cent, compared to 0.5 per cent in many low-income nations. Raising property tax rates will help them catch up to those enacted in comparable economies.
- Improve consistency between the three valuation methods used for the various land-related taxes by basing tax rates on capital values that are indicative of market values.
- Establishing trustworthy records of land ownership connected to Computerized National Identity Cards (CNICs) and National Tax Numbers should be continued or finished.
- To ensure that significant and expanding periurban communities outside of already designated municipal boundaries are likewise subject to proper land taxation, improve the policy and legal framework.
Sales taxes on services, agricultural income taxes, and property taxes are the three main sources of funding for Pakistan’s provinces.
Despite the agricultural sector’s significant contribution to GDP, the World Bank and the IMF’s respective tax policy reviews have examined agricultural income taxation and have highlighted the resulting fractionalization of the income tax base due to the split between federal and provincial governments and the exceptionally low revenue performance.
Read More: World Bank Thinks Pakistan is Still Not Taxing People Enough
Low collection rates for property taxes, which are the joint duty of provincial, district, and town governments, are caused by valuation tables that grossly underestimate current market values and/or possible rental revenue, particularly for self-occupied property.
The lack of incentives for property tax collectors to increase income has been addressed in recent scholarly work on provincial property taxation. To counteract these problems and widen the revenue base, the lender has issued the aforementioned proposals.
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