ISLAMABAD:
As Pakistan seeks a substantial bailout from the International Monetary Fund (IMF) to stabilize its struggling economy, the IMF has proposed imposing an individual income tax rate of up to 45% on agricultural income. This suggestion aims to eliminate disparities in the income tax regime without needing constitutional amendments, as reported by sources within the Ministry of Finance.
The IMF has outlined structural benchmarks for the upcoming bailout program, including a deadline of October 2024 to amend provincial laws to align with federal income tax laws. Additionally, the IMF demands the removal of income tax exemptions for the livestock sector by October of this year.
Although the Constitution prevents the federal government from taxing agricultural income, provinces have the authority to collect taxes from the agriculture sector, which contributes 24% to the economy but less than 0.1% to total tax revenue. The IMF’s approach avoids altering the constitutional framework and instead urges provinces to adopt the non-salaried business individual tax rates, which are as high as 45% of net income.
Prior to the budget, the highest salaried income tax rate was 35% on monthly incomes exceeding Rs500,000. Post-budget, this rate applies to monthly incomes over Rs341,000, and a 39% rate applies to incomes over Rs833,000. For non-salaried individuals, the rate is now 45%, with a potential surcharge increasing to 50%. The IMF condition mandates adopting a 45% income tax rate for agricultural income as well.
According to the World Bank, taxing agricultural income could yield revenue equal to 1% of Pakistan’s GDP, approximately Rs1.22 trillion at the current economic scale. Provincial governments have largely agreed to the IMF’s demand, with ongoing discussions, such as with the Sindh government, highlighting concerns about the high tax rates compared to the existing 15% maximum rate.
The provinces are required to amend their agricultural income tax regimes to match federal personal income rates by January 2025. Suppose a provincial government is unable to collect the revised tax. In that case, the Federal Board of Revenue will be authorized to collect the tax from farmers and landlords until the provinces develop their collection mechanisms.
Punjab has already agreed to the new tax regime, and despite initial resistance, Sindh may eventually comply. Currently, provinces have varying tax rates for agriculture. In Sindh, for example, annual agricultural income up to Rs1.2 million is exempt, with higher incomes taxed at rates from 5% to 15%. Meanwhile, salaried individuals face a 35% tax rate on annual incomes of Rs4.1 million, reflecting a disparity that has led to dissatisfaction among the salaried class.
During a seminar in Lahore, President Asif Ali Zardari mentioned that the federal government plans to tax agricultural income under IMF conditions, with provincial governments leading the initiative. Sindh also imposes an advance income tax on irrigated and non-irrigated land, though exemptions exist for smaller landholdings.
Prime Minister Shehbaz Sharif has tasked his finance minister with finalizing the staff-level agreement with the IMF by the end of July. The Finance Ministry still needs to give the Standard and Poor’s credit rating agency a definitive date for finalizing the IMF deal, resulting in S&P continuing to assign a junk rating to Pakistan.
The IMF believes that the new tax rates will eliminate disparities by taxing agricultural income similarly to other incomes. In Khyber-Pakhtunkhwa, where agriculture is not the main income source, up to one acre of land is exempt from income tax, with a maximum rate of 17.5% or Rs15,000 per annum. In Punjab, agricultural income up to Rs1.2 million incurs a nominal annual tax of Rs2,000, with rates increasing for higher incomes.
Additionally, the IMF is pushing for the expansion of the GST on services by eliminating current exemptions within a year to enhance transparency and close loopholes. Although an 18% sales tax on fertilizer and pesticides was proposed, the federal government managed to protect farmers from this tax. However, the salaried class remains subject to high-income tax rates, which are more typical of Scandinavian countries that provide extensive services to their citizens.