Farm tax collection plan still unclear amid IMF review – Pakistan

ISLAMABAD: Despite enabling legislation passed by all the four provincial assemblies on agriculture income tax (AIT), ongoing review talks with the International Monetary Fund (IMF) have yet to achieve final clarity on its implementation mechanism for effective collection, targeted to take effect from July 1, 2025.

Informed sources told Dawn that the visiting IMF review mission, led by Nathan Porter, spent nearly two days engaging individually with all the provinces and holding a joint technical workshop to explore the way forward for effective and uniform AIT collection.

The sources revealed that despite commitments for enhanced data sharing, the federal and provincial governments had yet to exchange negative and positive lists for general sales tax (GST), a matter of concern for the IMF. AIT remains a central theme of the $7 billion Extended Fund Facility (EFF).

According to the sources, Punjab had made initial progress in potential AIT implementation due to its largely digitised land records. However, the province left tax rates outside the AIT law passed last year.

Federal, provincial govts yet to exchange negative, positive lists for GST

Meanwhile, Sindh informed the IMF mission that its assembly had passed the AIT law despite political challenges, but the province was not yet prepared for collection. Sindh requested IMF guidance on a way forward, which could then be discussed with other provinces for uniformity.

At present, Punjab and Sindh have exempted agricultural land holdings below 12.5 acres and 25 acres, respectively, from AIT. The two provinces would need to align their exemption thresholds with IMF involvement and Federal Board of Revenue (FBR) support. However, there is still ambiguity regarding the extent to which the FBR can assist provincial tax authorities.

Khyber Pakhtunkhwa representatives reported that 75-80 per cent of agriculture in the province falls outside AIT coverage due to smaller land holdings, with few landowners meeting the 12.5-acre threshold set by Punjab. Additionally, agricultural incomes below Rs600,000 remain exempt from taxation.

Similarly, Balochistan indicated that taxable agricultural incomes in the province are negligible.

Overall, all the four provinces highlighted their limited technical capacity to implement AIT effectively. Given that the FBR itself has struggled to ensure full tax compliance in relatively well-documented urban sectors, provincial tax agencies — still in their nascent stages — are unlikely to achieve effective enforcement in remote rural areas.

As a result of these discussions, it emerged that the IMF may need to provide a broad policy framework with FBR support. The sources, however, said the IMF’s overarching stance is to align AIT with taxation on other income sources. A working paper suggested AIT exemption for annual incomes up to Rs600,000 and a 15pc tax rate for incomes between Rs600,000 and Rs1.2 million.

For annual incomes between Rs1.2m and Rs1.6m, a fixed tax of Rs90,000 plus 20pc of the income exceeding Rs1.2m would apply. Incomes between Rs1.6m and Rs3.2m would be taxed at a fixed rate of Rs170,000 plus 30pc on income exceeding Rs1.6m. Higher income brackets would see further increases, with incomes between Rs3.2m and Rs5.6m subject to a fixed tax of Rs650,000 plus 40pc on amounts exceeding Rs3.2m.

Under the $7bn EFF agreed upon in July last year, Pakistan committed to improving information sharing between the FBR and provincial revenue authorities on a weekly basis. The provincial tax reforms include aligning AIT regimes with federal personal and corporate income taxes by October 2024, with implementation set for January 1, 2025, and collection beginning in July 2025. Additionally, GST on services is set to transition from a positive list to a negative list.

The FBR is expected to ensure that all requested information under memorandums of understanding (MoUs) with provincial revenue authorities — including details on AIT and GST service credit claims — is shared in a timely manner, with delays not exceeding one week.

The provinces agreed to transition the services GST from a positive list to a negative list approach, effective from the start of FY26. This strategic shift aims to enhance transparency and minimise loopholes by ensuring that all services are taxable unless explicitly exempted.

Published in Dawn, March 13th, 2025