Agriculture income tax collection mechanism under review ahead of 2025 rollout

ISLAMABAD: Following the passage of enabling legislation on agriculture income tax (AIT) by all four provincial assemblies, discussions with the International Monetary Fund (IMF) are still ongoing to finalise the implementation mechanism aimed at effective tax collection, which is scheduled to commence on July 1, 2025.

According to Dawn, the IMF review mission, headed by Nathan Porter, spent nearly two days conducting individual meetings with representatives from each province and a joint technical workshop to strategise on uniform AIT collection.

A significant concern for the IMF has been the lack of data sharing between federal and provincial governments. They have yet to exchange both positive and negative lists regarding the general sales tax (GST).

AIT is a crucial component of the $7 billion Extended Fund Facility (EFF).

Punjab has made some headway in preparing for AIT implementation, thanks to its mostly digitised land records, although it has yet to finalise tax rates within the AIT law passed last year. In contrast, Sindh has informed the IMF team that it has passed the AIT legislation amidst political hurdles but is not yet ready to begin collection. Sindh is seeking IMF guidance for future directions to ensure alignment with other provinces.

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Currently, Punjab exempts agricultural land holdings below 12.5 acres, while Sindh sets its threshold at 25 acres. Both provinces will need to synchronise their exemption criteria with input from the IMF and assistance from the Federal Board of Revenue (FBR). However, there remains uncertainty over the extent of FBR’s support for provincial tax authorities.

Representatives from Khyber Pakhtunkhwa reported that 75-80 percent of agricultural land in the province falls outside the AIT due to smaller holdings, as few landowners meet Punjab’s 12.5-acre requirement. Agricultural incomes under Rs600,000 are also exempt from taxation.

Similarly, Balochistan noted that taxable agricultural incomes in the province remain minimal. Collectively, the provinces pointed out their limited technical capacity to implement AIT effectively.

Given that the FBR has already struggled with tax compliance in well-documented urban sectors, provincial tax agencies—still developing—are unlikely to enforce tax collection successfully in remote rural regions.

The discussions indicated that the IMF may need to provide a comprehensive policy framework, in conjunction with FBR support. The IMF’s overarching position advocates aligning AIT with taxation on other income sources.

A working paper proposed that annual incomes up to Rs600,000 be exempt from AIT, with a 15 percent tax rate applicable to incomes between Rs600,000 and Rs1.2 million.

For incomes between Rs1.2 million to Rs1.6 million, a fixed tax of Rs90,000 plus 20 percent on income exceeding Rs1.2 million would apply, while incomes between Rs1.6 million and Rs3.2 million would incur a fixed rate of Rs170,000 and a 30 percent tax on income above Rs1.6 million.

Higher income brackets would face additional increases, with those earning between Rs3.2 million and Rs5.6 million subject to a fixed tax of Rs650,000 plus 40 percent on amounts above Rs3.2 million.

Under the $7 billion EFF agreement reached in July of the previous year, Pakistan pledged to enhance information sharing between the FBR and provincial revenue authorities on a weekly basis. Provincial tax reforms include aligning AIT systems with federal personal and corporate income taxes by October 2024, with a targeted implementation date of January 1, 2025, and actual collection beginning in July 2025. Additionally, the GST on services will shift from a positive to a negative list approach.

The provinces have also agreed to transition the services GST from a positive list to a negative list strategy, effective from the beginning of FY26. This strategic move aims to enhance tax transparency and reduce loopholes by ensuring all services are taxed unless specifically exempted.