ISLAMABAD:

As Pakistan seeks a multi-billion dollar bailout from the International Monetary Fund (IMF) to stabilise its chronically ailing economy, the global lender has suggested introducing a standard personal income tax rate of up to 45% on agricultural income – a move that could end income tax disparities without requiring a constitutional change.

According to sources in the Ministry of Finance, the condition is part of the structural criteria set by the IMF for the next bailout programme that Pakistan is negotiating with the global lender.

Subject to a new agreement, the sources said the global lender has set an October 2024 deadline for amending existing provincial laws to align with federal tax law. The IMF has also demanded that all tax exemptions for the livestock sector be repealed by October of this year.

Under the Constitution, the federal government cannot levy taxes on income from agriculture. The provinces are authorized to collect taxes from the agricultural sector, which contributes 24% to the economy but does not contribute even 0.1% of the total taxes collected nationwide.

The IMF did not change the constitutional arrangements but instead asked provinces to simply adopt income tax rates for non-salaried self-employed people, which can be as high as 45% of net income.

Before the budget, the income tax rate for employees was 35% of gross monthly income above Rs 500,000; after the budget, it is 35% of monthly income of Rs 341,000 and 39% of monthly income of Rs 833,000. For the unemployed, the new rate is 45% of net income, and after the additional fee, 50%. The IMF has set a condition for adopting the standard personal income tax rate of 45% also in the case of income from agricultural activities.

In its latest series of reports, the World Bank estimated that Pakistan could collect farm income tax equal to 1% of gross domestic product. Given today’s projected size, this is equivalent to 1.22 trillion rupees.

The sources said provincial governments have largely agreed to the IMF’s demand. They said the IMF team also held a meeting with Sindh government officials on Tuesday. During these meetings, the Sindh government felt that the personal income tax rate in the agriculture sector, ranging from 35% to 45%, was too high compared to the prevailing maximum rate of 15%.

When the IMF began negotiations with provincial governments, the maximum personal income tax rate was 35%. The federal government had already raised it to 45% in July.

The sources said that under the IMF’s terms, the four provinces would have to change their agricultural income tax systems to fully align with the federal personal income tax rates. They said that under the terms, the corporate income tax rate would apply to corporate farming.

The IMF also set a condition that the provincial authorities end the current income tax exemption on income from animal breeding by the end of October.

As per the IMF’s request, each province will start collecting up to 45% of agricultural income tax by January 2025. In case any provincial government is unable to collect the revised tax, it will authorise the Federal Board of Revenue to collect the tax from farmers and landowners until the federating units work out a mechanism to collect these taxes.

Sources said the Punjab government has already given its nod to a new income tax system for the agriculture sector. They said the Sindhu government had issues with higher rates but may eventually agree.

Currently, provinces have different income tax rates for the agricultural sector. Compared to the national income tax exemption threshold of Rs 600,000, in Sindh agricultural income up to Rs 1.2 million per year is exempt from tax. From Rs 1.2 million to Rs 2.4 million the rate is 5%, up to Rs 4.8 million the rate is 10% and above Rs 4.8 million the rate is 15%.

A salaried person is now forced to pay 35% income tax on an annual gross income of Rs 4.1 million. The salaried class has fallen victim to the government of Prime Minister Shehbaz Sharif as they have no voice and no recourse to street agitation.

Addressing a seminar in Lahore on Tuesday, President Asif Ali Zardari said the federal government plans to tax agricultural income on IMF terms. The president said provincial governments will lead the initiative to tax large farms according to their profitability and expenditure.

Sindh also has an advance income tax of Rs 200 per acre for irrigated land and Rs 100 per acre for non-irrigated land. However, up to 16 acres of irrigated land and 32 acres of non-irrigated land are exempted from this tax.

Prime Minister Shehbaz Sharif has set a July deadline for his finance minister to finalize a staff-level agreement with the IMF. The finance ministry could not provide a specific date for the IMF deal with Standard and Poor’s on Tuesday. S&P, which has given Pakistan a junk rating, has met with the finance minister but has not given a timeline for improving the rating.

The sources said the IMF believes the new tax rates will end inequality in the income tax system as agricultural income will be taxed on the same basis as other income.

In Khyber-Pakhtunkhwa, where agriculture is not the main source of income for most, up to one acre of land is exempt from income tax. The maximum income tax rate in KP is 17.5% or Rs 15,000 per year, whichever is higher.

In Punjab, for agricultural income up to Rs 1.2 million per year, the rate is just Rs 2,000. From Rs 1.2 million to Rs 2.4 million, the income tax rate is 5%, from Rs 2.4 million to Rs 4.8 million, the rate is 10%, and for annual income above Rs 4.8 million, the current rate is 15%.

Sources said the IMF has also asked for the expansion of the GST services list in the provinces by ending the current exempted items. It has given provincial governments a year to end these exemptions. The aim is said to be to increase transparency and reduce loopholes by ensuring that all items are taxable.

The IMF also demanded an 18% sales tax on fertilizers and pesticides, but the federal government effectively protected farmers. However, the prime minister did not care about the wage earner class and imposed an income tax on it, which is only applicable in Scandinavian countries, where the state provides all services to its citizens.