This Special Feature examines personal income taxation in developing Asia and the Pacific, which currently contributes a relatively small proportion of revenues in many economies in the region. The chapter provides an overview of the structural characteristics of PIT systems in the region and highlights opportunities to increase the revenues they generate.
Revenue Statistics in Asia and the Pacific 2025
Personal Income Taxation in Asia and the Pacific
Abstract
Tax revenues in Asia and the Pacific are lower than in Latin America and the Caribbean and the OECD on average, as was discussed in Chapter 1 of this publication. Increasing revenues from personal income tax (PIT) could help to narrow these differences while also enhancing the redistributive potential of tax systems in the Asia-Pacific region. However, policies to increase PIT revenues face a number of constraints, including high levels of informality, low levels of compliance and political economy challenges.
This Special Feature provides a brief analysis of the performance of PIT in developing Asia and the Pacific. It then identifies typical design features of PIT systems across the region and identifies key administrative challenges that influence their effectiveness.
This chapter has been adapted by the Asian Development Bank (ADB) from “Personal Income Taxation in Asia and the Pacific: Future Directions”, an ADB Governance Brief led by Sandeep Bhattacharya, senior public management specialist (Tax) and written by Janet Stotsky, tax research expert and consultant, ADB, and Maria Hanna Concepcion P. Jaber, consultant, ADB.
While developing countries in Asia and the Pacific have largely experienced sustained economic growth so far this century, chapter 1 explains that tax-to-GDP ratios across the region vary widely, and their trajectory is not uniform. Despite some gradual improvements, a common and ongoing challenge is the low share of PIT in total tax revenue.
Note: International trade taxes include customs and import duties, taxes on exports and other taxes on international trade and transactions.
Source: OECD (2025[1]), Global Revenue Statistics (database).
Figure 2.1 compares key revenue sources for Asia and the Pacific showing their revenues as a share of total tax revenues between 2010 and 2023. Over this period, the importance of PIT revenues has increased slightly, from 16.2% to 16.5% of total tax revenues. Meanwhile, revenues from corporate income tax (CIT) increased from 19.1% to 19.5% of total tax revenues, while also being significantly more volatile, consistent with the findings in OECD (2023[2]).1
Value added tax (VAT) has increased while international trade tax has diminished. PIT has two main components: tax on earned or labour income and tax on capital and other forms of income. The incidence of tax on earned income has been found to fall largely on workers as labour supply is relatively inelastic in comparison to demand. Assessment of capital income taxation is more complex because the supply of capital tends to be more mobile, especially in international settings.
In Asia and the Pacific, most PITs are levied on total taxable income using a global (comprehensive) approach, whereby income is aggregated and taxed with a uniform schedule. However, most of the region’s PIT systems have schedular components, such as taxation of capital gains at lower rates than other types of income. Some governments employ a dual PIT structure, taxing labour income at progressive rates and capital income with a flat or simpler structure, an approach which has efficiency and distributional implications.
Most personal income taxes in the region are imposed or assessed on the individual level, as is typical in developing economies throughout the world. However, some governments impose personal income taxes on a married couple or a household (joint taxation) rather than the individual. Some allow married couples to choose to be taxed jointly or independently. An example is Indonesia.
Personal income taxes typically have a defined schedule of marginal tax rates that increase with higher taxable income, though some, especially in Central Asia, have a flat non-zero rate. Income is grouped into brackets and the marginal tax rate is the rate applicable to additional income within the bracket. There is normally a threshold amount of income exempt from tax. This is sometimes referred to as the zero tax-rate bracket. Depending on the economy, there may be as few as one positive tax rate bracket and as many as 10 or more brackets.
Schedules of marginal tax rates vary widely in the region, but it is typical for the PIT to have around five brackets with a minimum tax bracket of between 10% and 20% and a maximum rate of about 35% to 40% (PwC, 2024[3]).
Without some adjustment or indexing of nominal thresholds for inflation, effective tax rates increase because of nominal changes in income. Due to the generally benign inflation environment in the region, automatic indexing for inflation is uncommon; governments in the region tend to adjust brackets and other nominal features of the PIT on an ad hoc basis.
Statutory PIT and CIT rates have been declining in the region in recent decades in contrast to the relative stability of VAT rates (ADB, 2022[4]; Gupta and Jalles, 2022[5]). The trends in PIT top marginal rates over time show a decline and a levelling, more recently, with a slight increase for higher‑income taxpayers. Table 2.1 presents the highest marginal PIT rate for selected economies in Asia and the Pacific.
Note: The rate is generally the highest statutory marginal personal income tax rate, inclusive of surtaxes but exclusive of local taxes.
Source: PwC (2024[3]).
Recent research suggests that the maximum PIT rate threshold, measured relative to per capita GDP, is higher in developing Asia than in Latin America or OECD economies (Gupta and Jalles, 2022[5]). In contrast, the minimum PIT rate threshold is lower than in Latin America but higher than in the OECD economies, relative to per capita GDP. There may be scope to increase PIT revenues by lowering the income level at which the top rate applies.
If there are multiple levels of government levying PIT, the cumulative tax rate would be higher than that of any single jurisdiction. Social security contributions and payroll taxes, which are typically levied only on labour income, also add to the cumulative tax burden on labour income (Enache, 2020[6]; Zee, 2007[7]). In the developing economies of Asia and the Pacific, it is unusual to have multiple layers of PIT and social security contributions are typically not well developed. It is more common for revenues from national taxes, such as PIT, to be shared between the central and subnational government, as occurs in People’s Republic of China, India and Thailand (OECD/ADB, 2023[8]).
PIT systems typically provide exclusions or exemptions for selected components of income. Common exclusions or exemptions in the region are pensions and allowances for students or people with disabilities; employer‑provided fringe benefits, including health insurance or housing allowances; interest on treasury or other government bonds; and interest on deposits in the banking system (ADB, 2022[4]; Gupta and Jalles, 2022[5]). Arguments put forward to justify these exclusions or exemptions include strengthening the social safety net; promoting activities that are seen to have social benefits or positive externalities; and reducing the cost of government borrowing.
PIT systems typically provide for deductions that reduce taxable income. Common deductions in the Asia-Pacific region include some forms of interest expense, medical or educational expenses, childcare expenses, and charitable contributions. If taxpayers derive income from unincorporated businesses, they can generally reduce taxable income with deductions related to earning that income.
Many personal income taxes allow deductions for income put into certain forms of tax‑preferred savings for retirement, if this income is taxable rather than exempt. A credit, which reduces tax payable, can also be used in place of other tax preferences. Most personal income taxes in the region allow a full or partial credit for personal income taxes paid to other jurisdictions. Often the rationale is that these expenses affect the ability to pay tax. Another common rationale is to promote socially beneficial activities.
The basic exemption or zero tax-rate bracket tends to be considerably below per capita GDP in advanced economies, including those in Asia and the Pacific. However, it is usually set above per capita GDP in developing economies, reflecting the low level of household incomes in general. In most of developing Asia and the Pacific, the zero tax-rate bracket is typically set sufficiently high that the bulk of the working population is effectively exempt from the tax.
Extensive use of exemptions and deductions tends to erode the tax base and reduce effective progressivity because some exemptions tend to benefit higher income taxpayers disproportionately. When not limited to activities with high social benefits, they may also reduce efficiency (OECD, 2025[9]).
Taxes on capital income, including from interest, dividends, and capital gains, are an important part of the personal income tax but play an undersized role in the developing economies of the Asia-Pacific region. Under a global income tax, capital income is consolidated with other forms of income; however, it is typically taxed at a lower rate than labour income. Further, different forms of capital income are often taxed at different rates as well, as would be the case under a schedular tax or a dual income tax (Zee, 2007[7]).
Interest income and dividends are typically taxed in the region’s developing economies at a flat rate, in the order of 10% to 20%, although, in some economies, this income is consolidated with other forms of income. Interest income and dividends comprise a relatively small share of PIT revenues and are generally not reported separately.
Interest income that taxpayers receive is typically taxed, while interest on debt is tax deductible for businesses and, less frequently, for individuals. Deductions for mortgage interest vary and, when allowed, are usually limited to investment property. Special rules may apply to non-residents or foreigners who earn interest within a jurisdiction. Related party debt may result in limitations on debt deductibility to avoid abuse. Often income tax payable on interest is collected through withholding by the interest payers, such as financial institutions or governments.
Dividends are likewise typically taxed but may also be exempt, at least for some forms of investments that governments are trying to encourage or to avoid double taxation at the corporate and personal income levels. Dividends face double taxation if dividends are paid out of after‑tax income and then taxed again at the individual level. Governments in a few economies, typically the more advanced, attempt to relieve this double taxation through a form of integration of the corporate and personal income taxes, but most avoid this complexity. Tax on dividends is typically collected through withholding.
Capital gains (and losses) are treated in many different ways in the Asia-Pacific region. In some economies, capital gains are formally exempt, reflecting several key objectives, including the desire to promote capital markets, but also because revenue administrations face challenges in collecting this tax. In others, they are taxed. Revenues from this component of income typically comprise a relatively small share of PIT and are generally not reported separately.
Capital gains are typically taxable only upon the sale of the asset (i.e., realisation rather than accrual of the gain). Gains and losses are typically calculated as the difference between the sale price and purchase price of an asset, without adjustment for inflation, although there are a few economies that account for inflation’s impact on the measurement of capital gains through an adjustment of the purchase price (ADB, 2022[4]; Gupta and Jalles, 2022[5]).
Capital gains can generally be offset against capital losses. Capital loss carry-forwards differ considerably across the region. Some personal income taxes in the region have no specific provision. Some economies require matching of gains and losses by type or holding period.
Although the laws in the region define income broadly, their bases are diminished by a large number of tax preferences. The preferential treatment of capital gains and other forms of capital income, combined with tax preferences on labour income and poor compliance, may narrow the PIT base, distort economic behaviour and reduce progressivity.
Revenues forgone as a result of tax expenditures can be estimated by a variety of techniques (Caner, 2023[10]). Tax expenditures are an important source of revenue loss in developing Asia and the Pacific, estimated at about 2% of GDP or 14% of revenue (ADB, 2022[4]). Although such instruments are used across all taxes, there may be considerable scope to reduce tax expenditures in PIT across the region.
Only a few economies, such as Pakistan, have created an accounting system that permits accurate estimation of tax expenditures. Regular reporting on tax expenditures in annual budget submissions is essential to highlighting the loss of revenue from tax preferences. It would benefit the region to have tax administrations create public use datasets, properly anonymised, so that government officials and non-government researchers could assess tax expenditures and stimulate debate on their use.
Governments across Asia and the Pacific have made significant though widely varying efforts to improve tax and customs administration in recent years, including through institutional reorganisation of tax administration on a functional basis, better coordination of tax and customs administrations, and the creation of large taxpayer units (ADB, 2024[11]; Chooi, 2022[12]).
In addition, governments in the region have focused on automating their systems, strengthening training and staff quality, and improving legal systems that underpin tax enforcement. Large taxpayer units have generally been found to enhance overall collections when administered properly but have tended to have narrow revenue coverage and limited staffing in economies in Asia and the Pacific (Chooi, 2022[12]).
There are many factors that weigh on taxpayers’ willingness to pay a PIT, including their view of the public services they receive in return. Several studies emphasise the importance of taxpayers’ perception of the fairness of taxes and the personal income tax, in particular on morale and the ability to levy a progressive personal income tax (Besley, Jensen and Persson, 2023[13]; Hoy, 2025[14]).
Compliance analysis assesses the gap between tax liabilities and actual collections. There are many ways to measure the tax compliance gap, and the particular approach depends on the tax being investigated. PIT evasion is typically measured through the use of random audits of taxpayers designed to uncover the component of income on which they are not paying tax. There are few good estimates of the PIT gap in economies in Asia and the Pacific. However, evidence from Indonesia suggests that the overall tax gap is considerable (Nair and Utama, 2023[15]).
A key element in effective PIT administration is the accurate and comprehensive identification of those taxpayers who should be paying the tax and would have incomes above the threshold, which entails using various tools such as registries of taxpayers, corporate and business associations, and other sources. The self‑employed, which includes both well‑compensated professionals and small businesses, pose a particular challenge for tax administrations because of the difficulty in measuring their incomes. This is true in advanced as well as developing economies and highly effective tax administrations are needed to ensure the compliance of this sector. In addition, in many developing economies, even basic withholding by employers is often lax. Addressing these shortcomings would help reduce the tax compliance gap.
Developing economies in Asia and the Pacific also have a large informal sector comprised of those who are not registered with the tax system and, by and large, earn less than the threshold for taxation. Figure 2.2 presents data on registered taxpayers as a share of the labour force. The majority of economies have a relatively small proportion of registered taxpayers, reflecting the prevalence of informal employment or lack of compliance. As economies grow, informality tends to decline, and this reduction contributes greatly to the ability of tax administrations to keep track of personal income taxpayers. A simple presumptive tax may be best for taxpayers below the threshold for taxation and small businesses who may or may not be above the threshold but do not comply with PIT.
Source: ADB (2024[11])
Note: The very high share in some economies may reflect that registration is used for social program eligibility.
Because of the high informality rates in Asia and the Pacific and difficulties administering the PIT, the actual incidence of PIT in the region falls mainly on formal sector wage income, especially of public sector workers and employees of large multinational or national firms. Meanwhile, the large informal workforce mostly escapes the income tax net or pays only indirectly. Some economies, such as Bangladesh, have tried to improve PIT compliance by levying advance income tax on imports. This approach, however, may distort the structure of the tax and can reduce the tax administration’s incentive to collect the full tax liability, even if advance payment does not cover it.
Studies emphasise the importance of developing an effective system of withholding and third‑party reporting on wages and salaries and some forms of capital income, such as interest and dividend income. Third‑party reporting is critical to achieving high levels of PIT compliance. Nonetheless, some incomes, especially of high‑income taxpayers, tend to fall outside of income subject to withholding or third‑party reporting (ADB, 2024[11]; Okunogbe and Tourek, 2024[16]; Jensen, 2022[17]). Improving communication with taxpayers and their education, emphasising social norms in interactions with taxpayers, and publicising good and bad compliance can complement the inherent limitations to third-party reporting (Jensen, 2022[17]).
Table 2.2 presents key arrangements for the taxation of employees under the personal income tax in the region. Tax withholding applies to employee wages in almost all economies. However, the economies are split in terms of whether employees are required to register with the tax administration and file tax returns. Model 2 may be more effective than Model 3 when tax administration capabilities are weak, but Model 3 is likely to ensure greater compliance when tax administration capabilities are stronger. Model 1 may work well when the PIT system is fairly simple and withholding on wages, supplemented by withholding on capital income, accurately approximates the final tax liability.
Note: Sri Lanka and Thailand reported no need for employees to register but a requirement to file tax returns. There is no personal income tax regime in Vanuatu.
Source: ADB (2024[11])
Tax administrations throughout the developing world, including in Asia and the Pacific, are automating their tax systems (OECD, 2024[18]). As well as narrowing the scope for corruption, automation also enables the development of sophisticated compliance risk management and strategies for auditing.
Electronic filing and payment are beneficial to taxpayers and reduce compliance costs. Effective automation allows a reduction of staff in manual, low value‑added activities like registration and redeployment to higher value‑added activities like audit. There is a positive correlation between use of technology and tax collections, highlighting the importance of this aspect of modern tax administration reform for increasing PIT collections (Okunogbe and Tourek, 2024[16]).
Tax administration effectiveness also depends critically on well‑trained staff. It is possible to measure the responsiveness of collections to the quantity and quality of personnel, which can be summarised in an enforcement elasticity (Keen and Slemrod, 2017[19]). An examination of the relationship between population to tax administration staff ratios and tax‑to‑GDP ratios finds an inverse relation, suggesting the importance of having adequate staff in place (Keen and Slemrod, 2017[19]).
Developing economies in Asia and the Pacific struggle to raise the quality of their tax administration staff, in part because it is difficult for governments to pay competitive salaries but also because of rigidities in civil service systems and reluctance to reform. Bangladesh is a case in point, even if it is not unique in the region for this problem (Stotsky et al., 2022[20]; Hassan and Prichard, 2016[21]).
This summary of tax administration issues suggests that there is considerable scope for improving PIT collections in the Asia-Pacific region through more effective tax administration. There is scope for improving all key aspects of tax administration, including the organisation of tax administrations and coordination across agencies of government, automation of tax administration functions, and civil service reform to improve the quality and quantity of tax administration staff, coupled with efforts to strengthen legal frameworks, reduce corruption, and improve transparency (Besley, Jensen and Persson, 2023[13]; Hoy, 2025[14]).
PIT systems in Asia and the Pacific vary in structure, effectiveness and administration. However, in general across developing Asia and the Pacific, the role of PIT remains underutilised, with its revenue-raising and redistributive impact constrained by narrow tax bases, high informality, and limited administrative capacity. There is considerable scope to strengthen PIT performance in the region, such as by broadening the tax base by rationalising exemptions and deductions. Enhancing administrative capacity through automation, improved taxpayer identification, and better enforcement mechanisms is also critical. Ultimately, a well-designed and effectively administered PIT system can play a significant role in achieving both fiscal sustainability and inclusive development.
References
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← 1. According to the study by the OECD, tax buoyancy of corporate income tax (CIT), which measures changes in CIT revenues in response to changes in gross domestic product (GDP), is above one in the Asia-Pacific region, especially in the short run. This means that CIT revenues tend to increase faster than GDP in the long run and are more volatile in the short run.