World Bank emphasize Sustainable Economic Reforms

October 4, 2023

In its latest report, the World Bank has crafted a comprehensive roadmap to address fiscal challenges characterized by revenue weaknesses and expenditure policies contributing to economic imbalances, resource allocation distortions, and stifled productivity growth.

To achieve substantial fiscal consolidation and ensure macroeconomic sustainability, the report advocates an immediate implementation of a broad policy reform program. This program aims to rectify systematic resource misallocation arising from distorting tax policies, enhance spending quality by reducing administrative costs and regressive subsidies, and ultimately bolster economic stability.

The World Bank’s recommendations include several measures to overcome fiscal constraints and enhance revenue collection.

Firstly, it underscores the importance of setting priorities for revenue enhancement by reducing sales tax exemptions and bolstering administration.

To this end, the report suggests eliminating the 8th schedule of the Sales Tax Act and applying the standard rate to all goods, removing concessional rates on sales tax on goods, and limiting zero-rating exclusively to exports.

Furthermore, the report recommends moving domestically sold goods from the 5th schedule of the Sales Tax Act to the exempt list under the 6th schedule before rationalizing exemptions.

Broadening the tax base is another key focus. This involves integrating individuals and individually owned businesses, including retailers, into the tax system, reducing the tax-free threshold, and simplifying the personal income tax structure. Merging tax schedules for salaried and non-salaried taxpayers is also proposed to eliminate opportunities for tax arbitrage.

The report also suggests collapsing the two-tier tax structure into a single rate, levying the premium excise tax rate on an ad-valorem basis for automatic indexation to inflation.

To establish a foundation for medium-term recovery and stability, the report recommends reducing tax exemptions significantly and expanding the tax base through higher taxes on agriculture, property, and retailers. This includes reevaluating the 12 ½ acre tax exemption threshold for agricultural land, categorizing land appropriately for tax rates based on size, location, and irrigation status, and strengthening property tax collection by harmonizing valuation systems and aligning tax rates with market prices.

Furthermore, the report calls for the improvement of public expenditure quality by reducing distorting subsidies, enhancing the energy sector’s financial viability, increasing private participation in state-owned enterprises, strengthening public debt management, and developing a domestic debt market.

In conclusion, the World Bank emphasizes the importance of fiscal reforms to reduce subsidies related to electricity, gas, and other distortionary activities to promote sustainable economic growth.