Taxing Pakistan’s agriculture sector: IMF push ‘a move in the right direction’

Experts welcomed International Monetary Fund’s (IMF) push to increase agriculture tax, a development that comes after authorities in Pakistan reached an agreement for a $7-billion 37-month Extended Fund Facility (EFF) with the Washington-based lender on Friday.

Similar to the previous programmes, Islamabad will now be required to tick a number of prerequisites to claim the funds going forward, which includes the usual demands for fiscal consolidation, appropriate monetary policy, flexible exchange rate, and reforms on the energy sector.

However, this time around, the reforms’ agenda also includes the country’s agriculture sector and its income being brought into the taxation system.

Finance Minister Muhammad Aurangzeb, this week, had also said that in-principle an understanding with the provinces has been reached with regard to taxing agriculture income.

The IMF in its statement stated that “all provinces are committed to fully harmonizing their Agriculture Income Tax regimes through legislative changes with the federal personal and corporate income tax regimes and this will become effective from January 1, 2025”.

H1FY24 agri sector output rebounds

Tahir Abbas, Head of Equities at Arif Habib Limited (AHL), termed the IMF demand a “step in the right direction.”

“This will broaden the country’s tax net and increase the number of filers, while also reducing tax evasion,” he told Business Recorder.

At present, the agriculture sector in Pakistan contributes 22% to the nation’s GDP and employs one-third of its workforce.

However, despite the size of this sector, its contribution towards the national kitty is negligible.

“We collect only Rs3 billion from the entire agri sector in the country as compared to nearly Rs400 billion from the salaried class,” Abbas said.

President opposes proposed agriculture tax

Citing a study conducted by the World Bank, Abbas said that if the potential of the agriculture sector is realized to the fullest, Pakistan can collect well over Rs1 trillion in additional tax revenue.

In Pakistan, the agricultural sector is currently taxed, but at the provincial level, and not the federal level.

As per reports, the IMF is reportedly recommending that Pakistan bring taxes on the agriculture sector in line with the tax structure for non-salaried individuals. If that is the case, “this new structure packs a punch, raising the highest effective tax rate from 15% to a whopping 45%,” Amreen Soorani, Head of Research at JS Global, wrote in a report on Saturday.

Agriculture is not the future of Pakistan

“On the fiscal front, the proposed reform has the potential to be a major game changer,” read the report. It also presents a crucial opportunity to bolster Pakistan’s fiscal health, it said.

“Any increase in agricultural taxes levied by the provinces would directly translate to a healthier national surplus. Every Rs150 billion collected translates to a 12bps reduction in the fiscal deficit as % of GDP.

“This translates to a potentially significant improvement in the deficit target for FY25. With the new tax system in place for 2HFY25, the deficit target could potentially drop from 5.9% to 5.4% – a notable 9% improvement solely due to this measure,” it added.

The brokerage house also raised concerns that a tight timeframe given by the IMF, coupled with potential administrative hurdles, raises concerns about possible delays in implementation.

“Beyond the tight deadlines, imposing a blanket tax collection system on all agricultural producers raises concerns. Challenges and potential resistance from some segments of the agricultural sector could arise.

“This, in turn, could lead to an unintended consequence: the expansion of the undocumented economy. Addressing these potential issues will be crucial for ensuring the successful implementation of the new tax regime,” it added.

The IMF has also directed to bringing retail, export, and agriculture sectors properly into the taxation system with the revenue collections to be supported by simpler and fairer direct and indirect taxation.