Pakistan’s agri tax target — long overdue reform or unrealistic goal?

The federal and provincial governments aim to boost revenue from Pakistan’s largely undertaxed farm sector by increasing agricultural tax rates through recent legislation, seeking to align them with taxes on other sectors. However, agriculturists argue that these expectations are misplaced, especially in a year when the very sector is already underperforming.

Following the recent rate hike, the Federal Board of Revenue (FBR) has set an agriculture tax collection target of Rs300 billion for the fiscal year (FY-25). While provincial tax authorities have yet to receive specific targets, they have been instructed to start making efforts for timely collection of taxes, according to sources.

Under the new legislation, agricultural income up to Rs600,000 is exempted from taxation, while earnings exceeding Rs5.6 million are taxed at 45 per cent. Additionally, a super tax of up to 10 per cent applies to agricultural incomes surpassing Rs500 million annually.

“This has been an exceptionally tough year for farmers. Input costs have soared, while major crop prices have collapsed. There are instances where farmers are being forced to sell their stock at half of last year’s prices. When they are already struggling to recover costs, imposing steeply higher taxes is neither fair nor wise”, said Muhammad Ismail Rahoo, former Sindh agriculture minister.

A recent Asian Development Bank report commented on the outlook for agriculture’s contribution to Pakistan’s economy, stating, “…However, growth in agriculture is expected to weaken due to the heavy monsoon downpours during July–September 2024 and flood-like conditions in parts of the country. Wheat and cotton, two of Pakistan’s five major crops, are projected to perform poorly in FY2025”.

A progressive farmer supported a gradual increase in the agriculture income tax rate, allowing farm owners time to adjust and ensuring a phased implementation. “Shock and awe won’t work here”, he said. “Moreover, the government must not be swayed by optimistic revenue projections. It needs to keep food security in this populace nation in sight when making changes to the rural economy,” he cautioned. 

Some in the legal fraternity remain skeptical. “I’d be pleasantly surprised if tax collectors achieve even 10 per cent of their target,” remarked a tax lawyer from Lahore. “This ambitious goal suggests one of two things — either the government is out of touch with reality or it plans to creatively mask the revenue shortfall on paper for donor consumption,” he added.

“Even collecting Rs30 billion, just 10 per cent of the Rs300 billion target, would be a tenfold improvement over the maximum Rs3 billion collected in agriculture tax so far,” noted a former member of the FBR.

“Rather than increasing revenue, this poorly timed move could discourage the next generation of farm owners from investing in modern practices to enhance productivity,” commented a senator from a landed background.

Many observers, however, welcomed these tax reforms, arguing that they address a major anomaly that unfairly favoured farm income over non-farm earnings. They termed the recent changes to agriculture income tax (AIT) ‘a long-overdue step in the right direction’.

Tax experts are largely skeptical of the initiative, calling it half-baked. “Although the measures aim to harmonise tax rates, broaden the tax base, and increase revenue, their effectiveness remains uncertain. The informal, cash-based nature of agricultural transactions, inaccurate income reporting, and the political clout of large landholders could impede successful implementation,” explained a lawyer.

In the absence of systematic input and output records, agriculturists will self-declare their net income, leaving tax collectors without the capacity or dependable data to verify accuracy.

“There is a high likelihood that most farm/orchard owners will either report income below the tax threshold or significantly understate it, and tax authorities at the national or sub-national level will have little legal recourse”, admitted a senior finance ministry source.

Agricultural income in Pakistan has historically been taxed much lower than other sectors, despite contributing 24 per cent to the GDP, employing nearly half the labour force, and bringing in an annual income of around Rs9 trillion.

Many politicians, across party lines, voiced reservations about the amendments, which were introduced under strong pressure from the finance ministry, deeming it necessary to clear the ongoing IMF review crucial for the continuation of the $7 billion Extended Fund Facility.

“I personally raised the issue with the finance minister. He listened to the challenges facing the rural economy amid climate change but maintained that the measure was indispensable for Pakistan’s economic recovery”, shared a senator from Sindh with medium-scale landholdings.

Rerhmatullah Wazir, a former member of the FBR, termed the Rs300 billion target overly optimistic and criticised the methodology as deeply flawed. “Agriculture is the backbone of Pakistan’s economy, and the consequences must be carefully evaluated before intervening in the crucial yet largely neglected sector. If the goal is to genuinely broaden the tax net, a minimal fixed tax of Rs10,000 per acre annually on cultivable land could be a viable starting point. If implemented effectively, it could generate up to Rs100bn for the exchequer — a significant improvement from a sector that currently contributes almost nothing in direct taxes despite its size”, he noted.