IMF Proposes 45% Tax Rate on Agricultural Income in Pakistan

As Pakistan struggles with its economic challenges, the International Monetary Fund (IMF) has put forth a significant proposal.

The IMF recommends imposing a standard individual income tax rate of up to 45% on agricultural income.

This move aims to address income tax disparities without requiring constitutional amendments.

Key Points:

1. Background and Structural Benchmarks:
   • Pakistan seeks an IMF bailout to stabilize its economy.
   • The IMF’s condition is part of the structural benchmarks for the next bailout program.
   • Provincial laws must align with federal income tax rates by October 2024.
   • The IMF also calls for ending income tax exemptions for the livestock sector by October this year.

2. Constitutional Constraints:
   • Under the Constitution, the federal government cannot tax agricultural income.
   • Provinces collect taxes from the agriculture sector, contributing 24% to the economy but only 0.1% of total taxes nationwide.
   • The IMF avoids touching the constitutional arrangement but urges provinces to adopt non-salaried business individuals’ income tax rates (up to 45% of net income).

3. Tax Rates and World Bank Estimate:
   • Before the budget, salaried income tax was 35% on monthly gross income over Rs. 500,000.
   • Right after the budget it is 35% on the monthly income of Rs. 341,000 and 39% on the monthly income of Rs. 833,000.
   • The new rate is 45% of the net income and after adding surcharge it is 50% for non-salaried individuals.
   • The World Bank estimates that Pakistan can generate farm income tax equal to 1% of GDP (approximately Rs1.22 trillion).

4. Provincial Consent and Challenges:
   • Provincial governments largely agree with the IMF’s demand.
   • The Sindh government finds the 35% to 45% income tax rate for the agriculture sector too high compared to the existing 15% maximum rate.

5. Implementation Timeline and Impact:
   • Provinces must align agriculture income tax regimes with federal rates.
   • Corporate farming will also be subject to corporate income tax.
   • Each province will collect up to 45% agriculture income tax by January 2025.
   • Khyber-Pakhtunkhwa exempts up to one acre of land from income tax.
   • Punjab’s rates vary based on annual agriculture income.

6. Transparency and GST Expansion:
   • The IMF also asks provinces to expand the GST on services by ending current exemptions.
   • The goal is to enhance transparency and reduce loopholes.

7. Challenges Ahead:
   • The IMF’s proposal aims to eliminate income tax disparities and treat agricultural income like other sources.
   • The government faces deadlines for finalizing agreements with the IMF and improving credit ratings.

Although the IMF had also demanded a levy of 18% sales tax on fertilizer and pesticides, but the federal government successfully protected farmers.

Balancing tax reforms while protecting farmers remains a challenge.

The proposed changes will significantly impact Pakistan’s fiscal landscape and economic stability.