Provinces agree to IMF demand for enhanced agricultural tax

ISLAMABAD: The International Monetary Fund (IMF) has called on Pakistan to accelerate efforts for enhanced agricultural income tax collection as part of negotiations for a new bailout to avoid default on its external and internal debt repayments.

Sources said that IMF experts held virtual negotiations with Pakistani authorities, including representatives from all four provinces. These discussions were conducted separately with each provincial government, involving officials from both federal and provincial finance ministries.

The IMF has insisted on better collection of income tax on agriculture. All four provinces have agreed to the IMF’s demand and requested two days to prepare a collection plan, which is to be submitted by July 12.

Sources said that the income tax on agricultural earnings will be imposed on annual incomes exceeding Rs0.6 million, aligning with standard income tax rates. The federal and provincial governments are working together to implement a unified agricultural income tax. The provinces have assured the IMF of their full cooperation on this issue.

Also read: Zardari calls for taxing big landholders

Finance ministry officials noted that the Khyber Pakhtunkhwa government had positive discussions with the IMF, which praised the province’s Rs100 billion surplus budget.

The current government has pledged to raise the tax-to-GDP ratio from 9.5 percent to over 13 percent in the next three years as part of its negotiations with the IMF for a bailout package to avert an economic meltdown and default. Experts believe that achieving this goal will require taxing every sector of the economy, including agriculture, which has significant revenue potential.

In Pakistan, the agriculture sector contributed less than 0.1 percent to the direct tax collection of Rs3.7 trillion in the last fiscal year. Agricultural income tax is a provincial subject, often opposed by big landholders, many of whom are legislators. Experts say that the provinces have limited capacity to assess farm incomes and collect taxes accordingly.

According to a report in Dawn, tax rates on farm income are much lower than federal rates on other income sources. The highest slab on agricultural income is just 15 percent in Sindh and Punjab, compared to nearly 39 percent on salaried individuals. An IMF paper has suggested that tax exemptions on agricultural income make this sector a legal, and sometimes illegal, tax shelter for other forms of income. Experts argue that applying federal tax rates to agricultural income could generate substantial revenues and reduce the economic burden on other sectors.