Pakistan’s agricultural tax higher than SAARC nations

Pakistan’s agricultural tax rates are significantly higher than those in neighboring SAARC countries.

For instance, the maximum agricultural tax rate in Pakistan is 45%, compared to 30% in Sri Lanka, 30% in India, and just 15% in Bangladesh. The minimum tax rate in Pakistan is 15%, compared to 6% in Sri Lanka, and 5% in both India and Bangladesh, according to a report by Institute of Cost & Management Accountants of Pakistan (ICMAP).

Analysts warn that these high rates could discourage compliance and hinder the growth of the agricultural sector.

Pakistan’s government has introduced a new agricultural income tax system, effective Jan. 1, 2025, as part of reforms demanded by the International Monetary Fund (IMF). The move aims to align agricultural taxation with other sectors and expand the tax base, but it has sparked concerns over compliance, enforcement, and its impact on farmers.

Historically, agriculture has been a largely untaxed sector in Pakistan. However, under pressure from the IMF, which tied the reforms to a $7 billion loan program, all four provinces have enacted laws to tax agricultural income. The new system imposes progressive tax rates ranging from 15% to 45%, with an additional 10% super tax on high-income landlords.

The IMF’s conditions required provinces to harmonize their agricultural tax rates with federal personal and corporate tax rates. While the initial deadline for legislative amendments was October 2024, provinces delayed implementation until early 2025.

Punjab and Sindh are expected to generate the highest revenue from the new tax system, with the World Bank estimating that agricultural tax reforms could increase Pakistan’s GDP by up to 1%.

Food Security

Agriculture contributes about 24% of Pakistan’s Gross Domestic Product (GDP) and accounts for half of the employed labor force. It is also the largest source of foreign exchange earnings.

According to the International Food Security Assessment by the U.S. Department of Agriculture, 38% of Pakistan’s population is expected to become food insecure between 2021 and 2031.

Though Pakistan experienced a green revolution from the 1960s to the 1980s, major food grain crop production has slowed or even declined.

Naseem Usman, of the Pakistan Cotton Association, highlighted a concerning decline in cotton production by 2.85 million bales, raising alarms within the industry. Experts attribute this shortfall to climate change, inefficient farming practices, and challenges faced by farmers.

Additionally, wheat production for the 2024-25 Rabi season may face a setback. The government warns that a decline in wheat prices could discourage farmers from planting at their usual scale. The price drop could lead to a significant reduction in wheat output, exacerbating the country’s ongoing food security challenges.

The country may face uncertainty in domestic wheat supply and higher flour prices, as production is expected to remain at 27.9 million metric tons this year.

Wheat and cotton, two of Pakistan's five major crops, are projected to perform poorly in FY25. This could diminish their valuable contribution to the country’s overall economic turnaround in FY25 and put pressure on the external economy.

Shortfalls in wheat and the rapid decline of cotton would necessitate imports, impacting foreign exchange reserves.

Challenges in Implementation

The new tax system faces several challenges, including outdated land records, weak enforcement mechanisms, and resistance from powerful landowners.

Farmers, who already bear heavy indirect taxes on inputs like fuel and fertilizers, argue that the new taxes could further strain their finances. This is particularly challenging given the unpredictable nature of farm incomes due to weather, pests, and market fluctuations.

Tax evasion is another major concern, with reports of large landowners splitting their holdings among family members to avoid higher tax brackets. Additionally, excluding the livestock sector from taxation in Sindh has left a significant revenue source untapped.

Political and Economic Implications

According to analysts, the introduction of agricultural income tax marks a significant departure from Pakistan’s traditional approach to taxing the sector.

While the reforms are expected to boost government revenue, they have raised concerns about the potential impact on food prices and rural livelihoods.

Political influence from powerful landowners remains a key obstacle, as past attempts to tax agriculture have failed due to legislative resistance.

Full implementation of the agricultural income tax system is expected by July 2025. Policymakers will need to carefully monitor its impact on the agricultural sector and the broader economy, making adjustments as necessary to ensure a fair and sustainable taxation system.