Despite the legislation passed by all four provincial assemblies on Agricultural Income Tax (AIT), the ongoing review talks with the International Monetary Fund (IMF) have yet to yield a final clarity on the effective collection mechanism, which is scheduled to be implemented from July 1, 2025.
The IMF review mission, led by Nathan Porter, spent about 2 days interacting individually with all the provinces and held a joint technical workshop to find a way to collect effective and uniform AIT.
Sources revealed that despite promises to increase data sharing, the federal and provincial governments have yet to exchange negative and positive lists for the General Sales Tax (GST), which is a concern for the IMF, as AIT is the focus of the $7 billion Extended Fund Facility (EFF).
Sources said Punjab has made initial progress in implementing the potential AIT, largely due to digitized land records, but the province has decoupled the tax rate from the AIT law passed last year.
Meanwhile, Sindh told the IMF mission that its assembly passed the AIT law despite political challenges, but the province is not yet ready for implementation. Sindh has sought guidance from the IMF to move forward, after which talks can be held with other provinces for uniformity.
Currently, Punjab and Sindh have exempted agricultural land of less than 12.5 acres and 25 acres, respectively, from AIT. Both provinces will have to align their exemption thresholds with IMF involvement and support from the Federal Board of Revenue (FBR), but there is still uncertainty about the extent to which the FBR can assist provincial tax authorities.
Representatives from Khyber Pakhtunkhwa said that 75 to 80 percent of agriculture in the province is outside the coverage of AIT due to small landholdings, few landowners meet the 12.5 acre threshold set by Punjab, moreover, agricultural income below Rs. 6 lakh will remain exempt from tax.
Similarly, Balochistan pointed out that there is no taxable agricultural income in the province.
Overall, all four provinces highlighted their limited technical capacity to effectively implement AIT, given that the FBR itself is struggling to ensure full tax compliance in the relatively well-documented urban sectors, provincial tax agencies are still in their infancy, and effective implementation in remote rural areas is unlikely.
The discussions resulted in the IMF needing to provide a broad policy framework with the support of the FBR.
However, sources say that the IMF’s basic stance is that AIT should be aligned with taxes on other sources of income. The working paper proposed AIT exemption for annual income up to Rs 600,000 and 15% tax on income between Rs 600,000 and Rs 120,000.
A fixed tax of Rs 90,000 will be imposed on annual income between Rs 120,000 and 160,000 and a fixed tax of 20% on income above Rs 120,000. Income between Rs 160,000 and 320,000 will be taxed at Rs 170,000 and 30% on income above Rs 160,000, Rs 650,000 on income between Rs 320,000 and 560,000 and 40% on income above Rs 320,000.
Under the $7 billion EFF agreed in July last year, Pakistan had committed to improving the exchange of information between the FBR and provincial revenue authorities on a weekly basis.
Provincial tax reforms include harmonizing the AIT system with federal personal and corporate income taxes by October 2024, with implementation set for January 1, 2025, and collection to begin from July 2025. Additionally, GST on services is set to shift from the positive list to the negative list.
The FBR is expected to ensure that all requested information, including details of AIT and GST service credit claims, are provided in a timely manner under the Memoranda of Understanding (MoUs) with provincial revenue authorities.
The provinces agreed to shift the Services GST from the positive list to the negative list, effective from the beginning of FY26. The strategic change aims to enhance transparency and minimize loopholes, ensuring that all services are taxable unless explicitly exempted.
