IMF proposes 45% tax on agriculture income

 As Pakistan seeks a multibillion-dollar bailout from the International Monetary Fund (IMF) to stabilise its chronically ailing economy, the global lender has suggested imposition of a standard individual income tax rate of up to 45% on agriculture income – something that may end the disparity in income tax regime without the need to amend the Constitution.

The condition is part of the structural benchmarks the IMF has defined for the next bailout programme that Pakistan is negotiating with the global lender, according to sources in the Ministry of Finance.

Subject to signing of the new agreement, the sources said that the global lender has set the October 2024 deadline to amend the existing provincial laws to bring them at par with the federal income tax law. The IMF has also asked for rescinding any income tax exemption for the livestock sector by October this year.

Under the Constitution, the federal government cannot impose taxes on agricultural income. The provinces are authorised to collect taxes from the agriculture sector that contributes 24% in the economy but does not contribute even 0.1% of the total taxes collected from across the country.

The IMF has not touched the constitutional arrangement but instead has asked the provinces to simply adopt the income tax rates of non-salaried business individuals that are as high as 45% of net income.

Before the budget, the salaried income tax rate was 35% on the monthly gross income of over Rs500,000, which after the budget is 35% on the monthly income of Rs341,000 and 39% on the monthly income of Rs833,000. For the non-salaried individual, the new rate is 45% of the net income and after adding surcharge it is 50%. The IMF has placed a condition to adopt the standard 45% individual income tax rate for agricultural income too.

In its recent series of reports, the World Bank has estimated that Pakistan can farm income tax equal to 1% of the Gross Domestic Product. This at today’s projected size of the economy is equal to Rs1.22 trillion.

The sources said that provincial governments have by and large given consent to the IMF’s demand. They said that the IMF team also held a meeting with the representatives of the Sindh government on Tuesday. During these meetings, the Sindh government’s view was that the 35% to 45% income tax rate for the agriculture sector was too high compared to the existing 15% maximum rate.

When the IMF started negotiations with the provincial governments, the maximum individual income tax rate was 35%, which the federal government has already increased to 45% from July.

The sources said that under the IMF condition, the four provinces will have to amend their agriculture income tax regimes to fully align those with the federal personal income rates. They said that according to the condition in case of the corporate farming, the rate of corporate income tax rate would apply.

The IMF has also set a condition that the provincial governments end the current income tax exemption available on livestock income by the end of October.