ISLAMABAD: As Pakistan seeks a substantial bailout from the International Monetary Fund (IMF) to stabilize its enduring economic challenges, the IMF has proposed a standard individual income tax rate of up to 45% on agriculture income. This proposal aims to equalize the income tax regime without necessitating constitutional amendments.
Sources within the Ministry of Finance indicate that this condition forms part of the structural benchmarks outlined by the IMF for the upcoming bailout program negotiations with Pakistan. The IMF has set a deadline of October 2024 for aligning provincial laws with federal income tax regulations, a step that would eliminate income tax exemptions currently enjoyed by the livestock sector by October of this year.
Under Pakistan’s Constitution, the federal government lacks the authority to impose taxes on agricultural income, which falls under the purview of provincial governments. Despite this constitutional restriction, the IMF’s approach sidesteps direct constitutional amendments, urging provinces to adopt the 45% individual income tax rate applicable to non-salaried business individuals.
Previously, salaried individuals faced a maximum tax rate of 35% on monthly incomes exceeding Rs500,000. Following recent revisions, these rates have increased, with non-salaried individuals now subject to a new 45% tax rate on net income, potentially rising to 50% with surcharges. The IMF now insists on applying this standard rate to agricultural income as well.
The World Bank estimates that taxing agricultural income could yield revenues equivalent to 1% of Pakistan’s Gross Domestic Product, amounting to approximately Rs1.22 trillion based on current economic projections.
According to sources, provincial governments have largely consented to the IMF’s demands, with discussions ongoing, particularly addressing concerns from the Sindh government regarding the proposed higher tax rates compared to the existing 15% maximum.
Under the IMF conditions, all provinces must amend their agricultural income tax laws to harmonize with federal rates by January 2025. In cases where provinces are unable to collect these taxes effectively, the Federal Board of Revenue may temporarily collect taxes from farmers and landlords until provincial mechanisms are established.
While Punjab has already signaled acceptance of the new tax regime, Sindh has expressed reservations but may ultimately comply.
The IMF’s initiative also extends to expanding the Goods and Services Tax (GST) on services across provinces, aiming to eliminate current exemptions within a year. This move is intended to bolster transparency and reduce tax loopholes by subjecting all items to taxation.
Despite efforts to protect farmers from increased taxes on fertilizer and pesticides, critics argue that the new income tax rates, akin to those in Scandinavian countries, may disproportionately burden Pakistan’s salaried class, highlighting concerns over equitable taxation policies amidst economic restructuring efforts.
