Government Plans to Bring SMEs into the Tax Net: Proposals Under Consideration

Government Plans to Bring SMEs into the Tax Net: Proposals Under Consideration

ISLAMABAD (News Desk) – The government is considering various proposals to bring small and medium enterprises (SMEs) into the tax net during the upcoming budget 2024-25. The International Monetary Fund (IMF) has recommended that Islamabad set an income limit for SMEs that aligns with international standards.

Current Tax Thresholds

According to “Jang,” the current income/trade threshold for SMEs in Pakistan is significantly higher than international standards, standing at $892,857. This is inconsistent with the sales tax registration threshold, which is set at 8 million rupees (approximately $28,571). The discrepancy between these thresholds creates challenges in compliance and tax administration.

IMF Recommendations

The IMF has suggested that the income/trade threshold should be aligned with the Value Added Tax (VAT) threshold. This alignment is expected to facilitate easier compliance for SMEs, streamline tax administration, and reduce the segmentation of companies based on their size. Additionally, it would help prevent the pooling of companies at the margins of the threshold.

Benefits of Proposed Changes

Facilitating Compliance

Aligning the income/trade threshold with the VAT threshold will simplify the tax registration process for SMEs. This simplification will encourage more businesses to register and comply with tax regulations, thereby broadening the tax base.

Streamlining Tax Administration

A unified threshold will make it easier for tax authorities to manage and monitor SMEs. This could lead to more efficient tax collection and reduced administrative costs.

Reducing Segmentation

By eliminating the large gap between thresholds, the government can reduce the segmentation of businesses. This move will prevent companies from artificially splitting their operations to stay below the higher income threshold, thereby fostering a fairer competitive environment.

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The government’s consideration of proposals to bring SMEs into the tax net by aligning income/trade thresholds with international standards is a positive step towards improving tax compliance and administration. Implementing these changes will benefit both the government and SMEs by creating a more streamlined and equitable tax system. As the budget for 2024-25 approaches, it will be important to watch how these proposals are developed and enacted.

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