Agriculture Income Tax In Pakistan – Big Rise Expected in FY 2025-26

agriculture income tax

Agriculture Income Tax is expected to get a big rise in the upcoming financial year 2025-26 starting from July 2025. Pakistan’s agriculture sector plays a significant role in its economy, contributing over 20% to the GDP and providing livelihoods to about 40% of the workforce. Despite its importance, agricultural income has historically escaped substantial taxation, which has created a disparity in the nation’s fiscal policies. The agricultural sector remains among the least taxed, even as other industries are subject to heavier taxes.

However, significant changes are on the cards as the Pakistani government and international institutions, such as the IMF, push for the introduction of effective agricultural taxation. This move, set to begin by July 2025, seeks to integrate agricultural taxation into the broader fiscal system. Several financial experts and economists are discussing and writing about the scope, challenges, and impact of this reform.

Key Facts About Agricultural Taxation in Pakistan

  • Despite common misconceptions, agricultural income in Pakistan is indeed taxed, though it operates differently from other types of income. Firstly, the collection of agricultural income tax is managed by the provincial authorities rather than the federal government. Secondly, the top tax rate on agricultural earnings is only 15% in provinces such as Punjab and Sindh, which is significantly lower compared to the higher rates applied to salaries and business revenues.
  • In order to broaden the tax base, along with the implementation of IMF recommendations, GoP is planning to revamp the Agricultural Tax effective next FY July 2025.

Statement of Finance Minister Muhammad Aurangzeb

Finance Minister Muhammad Aurangzeb announced on Wednesday [Oct 9, 2024], that a tax on the agriculture sector will be implemented starting July 1, 2025, as part of the National Fiscal Pact (NFP) agreed upon with the provinces.

Finance Minister Muhammad Aurangzeb – Government of Pakistan
Finance Minsiter Muhammad Aurangzeb

Background on Agricultural Taxation

Agriculture in Pakistan, a sector dominated by large landowners and influential individuals, has historically been under-taxed due to political sensitivities. Despite being a high-earning sector for many wealthy individuals, it has largely been spared from significant tax burdens. The federal government’s new initiative to introduce agricultural taxes is part of the broader National Fiscal Pact (NFP), which is designed to improve revenue collection from sectors that have been traditionally under-taxed.

According to Mr. Aurangzeb the Finance Minister of Pakistan, the new taxation is expected to take effect by July 2025, with legislation being introduced in January of the same year. This effort is part of a larger push for reforms to the tax system that will address fiscal deficits and the historical under-taxation of certain sectors, including agriculture.

Proposed Agriculture Income Tax

The IMF has strongly recommended a tax on agricultural income to enhance revenue collection and bring equity to the tax system. Currently, agriculture contributes only 0.1% of total taxes nationwide, which is disproportionately low considering its contribution to GDP. The IMF proposed a 45% tax rate on agricultural income, aligning it with the income tax rate on non-agricultural businesses and individuals.

However, the implementation of agriculture income tax has raised concerns about the fairness of such a high rate, particularly for small and medium-scale farmers. The primary challenge lies in distinguishing between large landowners who have high incomes and smallholder farmers who are often struggling to make ends meet. Taxing agricultural income without considering these nuances could exacerbate existing inequalities.

Challenges in Implementation

The political influence of large landowners has been a significant impediment to agricultural taxation. Many of these individuals hold powerful positions in government, making it difficult to pass legislation that directly affects their economic interests. The agriculture lobby has historically resisted attempts to bring this sector into the tax fold.

Another challenge is the decentralized nature of agricultural taxation in Pakistan. Currently, provinces are responsible for taxing agricultural income, but compliance has been minimal. The move towards a uniform federal agricultural tax is intended to streamline the process and ensure better enforcement, but it requires coordination with provincial governments. This is particularly important given the constitutional division of powers, which limits the federal government’s authority to directly impose taxes on agriculture.

Current Agricultural Taxation Framework

Under the existing legal framework, agricultural income is technically taxable under provincial laws, but in practice, collection rates are abysmally low. For instance, the Punjab Agricultural Income Tax Act of 1997 allows for the taxation of agricultural income, but due to weak enforcement and lack of political will, revenue collection from this source has been minimal.

As per the laws, income from agriculture is taxed based on landholding size, which does not accurately reflect the income generated from farming activities. Wealthy landowners often own vast tracts of land but manage to evade taxes due to loopholes and inefficient enforcement. The new reforms aim to shift the focus from land size to actual income earned, thereby ensuring that those with higher earnings contribute a fair share to the tax base.

The Punjab Agricultural Income Tax Act of 1997

In Punjab, the primary law governing agriculture income tax is the Agricultural Income Tax Act of 1997, introduced by the government under Prime Minister Nawaz Sharif. This legislation serves as a framework for taxing agricultural income, and its provisions are largely mirrored in other provincial laws concerning agriculture.

The Act clearly distinguishes between agricultural and non-agricultural income, outlining the criteria for tax liability. Under this law, the agricultural tax must be calculated and paid annually, with each assessment covering a one-year period. The fiscal year begins on July 1st and concludes on June 30th of the following year.

The ordinance establishes two types of agricultural taxes: a land-based tax and a tax on agricultural income.

agriculture income tax in pakistan

The Agricultural Income Tax Rule in the 1997 Act

Under this provision, the Federal Board of Revenue (FBR) assesses agriculture income tax based on the annual income generated by farmers or cultivators. Specific income thresholds are set, providing tax relief for lower incomes, while exceeding these thresholds incurs a corresponding tax liability.

The FBR calculates the taxable agricultural income after deducting applicable allowances from the gross income. Here is the method for the calculation of income tax in Pakistan for agriculture income.

  • If a farmer’s annual agricultural income does not exceed Rs. 400,000, no tax is applied.
  • For incomes between Rs. 400,000 and Rs. 800,000, a tax of Rs. 1,000 is levied.
  • If the annual income falls between Rs. 800,000 and Rs. 1.2 million, a tax of Rs. 2,000 applies.
  • For incomes exceeding Rs. 1.2 million but under Rs. 2.4 million, 5% of the amount over Rs. 1.2 million is payable as tax.
  • For those earning between Rs. 2.4 million and Rs. 4.8 million annually, a fixed sum of Rs. 60,000 plus 10% of the income exceeding Rs. 2.4 million is due.
  • If a farmer’s annual agricultural income surpasses Rs. 4.8 million, they are required to pay Rs. 300,000, plus 15% of the amount exceeding Rs. 4.8 million, as agricultural tax.
Farmer Annual IncomeAgriculture Income tax Chargeable
Up to PKR400,000NIL
From PKR400,000 to PKR800,000PKR1,000
From PKR800,000 to PKR1,200,000PKR2,000
From PKR1,200,000 to PKR2,400,0005% of the amount above 1.2M
From PKR2,400,000 to PKR4,800,000PKR60,000 + 10% of the amount above 2.4M
Above PKR4,800,000PKR300,000 + 15% of the amount above 4.8M

The Land Based Tax Rule in the 1997 Act

Under this provision, agricultural tax is levied based on the size of the land a farmer cultivates. The agriculture income tax rate varies depending on whether the land is irrigated or unirrigated. Essentially, two acres of unirrigated land are treated as equivalent to one acre of irrigated land for taxation purposes, meaning the tax on unirrigated land is half that of irrigated land.

According to the Act of agriculture taxation in Pakistan, if a farmer cultivates less than 12.5 acres, no tax is applicable. However, if the cultivated land exceeds 12.5 acres but is under 25 acres, the tax rate is set at Rs. 300 per acre. For landholdings between 25 and 50 acres, the tax increases to Rs. 400 per acre. For land over 50 acres, the tax rises to Rs. 500 per acre. Additionally, if the land is used for mature orchards, the tax rate is Rs. 600 per acre. The following table describes the tax on agri income with respect to land ownership as per 1997 Act.

Farmer Land OwnershipAgriculture Income Tax Chargeable
Up to 12.5 AcresNIL
From 12.5 To 25 AcresPKR300 Per Acre
From 25 To 50AcresPKR400 Per Acre
Above 50AcresPKR500 Per Acre
Land Use as Mature Orchards (Unirrigated)PKR300 Per Acre
Land Use as Mature Orchards (Irrigated)PKR600 Per Acre

Impact of Agriculture Income Tax on Small Farmers

While large landowners are expected to bear the brunt of the new taxes, smallholder farmers could also be affected if the tax rates are not carefully calibrated. Agriculture in Pakistan is often a subsistence activity, with many small-scale farmers barely generating enough income to meet their basic needs. A flat tax rate on agricultural income could disproportionately affect these vulnerable groups, pushing them further into poverty.

The government, therefore, needs to design tax brackets that exempt small farmers or provide tax credits for inputs and losses. This would ensure that only those who have substantial agricultural income are taxed, while protecting small farmers from financial distress. The Dawn articles emphasize the importance of considering the diverse nature of agriculture in Pakistan when designing these tax reforms

eputy commissioner’s office, the following categories can be selected.

Economic and Fiscal Benefits of Agricultural Taxation

Introducing a tax on agricultural income could have several long-term benefits for Pakistan’s economy. First, it would help increase government revenues, which are essential for funding development projects and public services. Given the country’s low tax-to-GDP ratio, expanding the tax base by including agricultural income is a necessary step toward fiscal sustainability.

Second, agricultural taxation could promote greater equity in the tax system. Currently, there is a significant disparity between the tax burden on urban businesses and salaried individuals versus wealthy agricultural landowners. By taxing agricultural income, the government would create a more balanced and fair taxation system. Finally, agricultural taxation could incentivize more efficient use of land and resources. With large landholdings no longer shielded from taxation, landowners may be encouraged to make more productive use of their land or lease it to smaller farmers who can cultivate it more effectively.

The Role of the IMF and International Pressure

The IMF has been a strong proponent of agricultural taxation in Pakistan as part of its broader economic reform agenda. In recent years, the IMF has repeatedly emphasized the need for Pakistan to expand its tax base and reduce its reliance on external borrowing. The proposal for a 45% tax rate on agricultural income is part of this broader effort to enhance revenue collection and ensure fiscal sustainability.

International pressure, particularly from lenders like the IMF, has been a key driver of tax reform in Pakistan. However, the government must balance these external demands with domestic realities, ensuring that the reforms are socially and politically feasible.

Recommendations for Effective Agriculture Income Tax

To ensure the successful implementation of agricultural taxes, the following measures should be considered:

1. Differentiated Tax Rates: A progressive tax system that imposes higher rates on large landowners and lower or no taxes on smallholders is essential. This will ensure that the tax burden is equitably distributed and does not disproportionately affect the poor.

2. Improved Enforcement: Strengthening tax collection mechanisms at the provincial level is crucial. This includes better tracking of income and landholdings, as well as closing loopholes that allow wealthy landowners to evade taxes.

3. Public Awareness Campaigns: Many farmers may not fully understand the implications of agricultural taxation. Public awareness campaigns that explain the benefits of taxation and how the revenue will be used could help build public support for the reforms.

4. Incentives for Small Farmers: Tax credits, subsidies, or exemptions for small farmers could help mitigate the impact of taxation on this vulnerable group. By offering incentives, the government can encourage compliance while protecting smallholder livelihoods.

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FAQs

Yes, the Agriculture Income Tax in Pakistan is chargeable under The Rule For Tax on Agricultural Income in the 1997 Act.

The maximum rate of Agriculture Income Tax in Pakistan is presently 15%.

As per IMF recommendation, the rate should be at par with the salaried class around the maximum of 45%. GoP is now in negotiation with IMF to lower it.

The new rates of Agriculture Income Tax in Pakistan are expected to be effective from next year July 2025.

Conclusion

Agricultural taxation in Pakistan is a complex but necessary reform that could help the country achieve greater fiscal sustainability and economic equity. While there are significant challenges, including political resistance and the need to protect small farmers, a well-designed tax system could unlock substantial revenue and promote more efficient use of agricultural resources.

The implementation of a tax on agricultural income in Pakistan poses both a need and challenges. Recent reforms aim to ensure that individuals with higher earnings contribute proportionately to the tax base, shifting the focus from land size to actual income earned. The Agricultural Income Tax Act of 1997, introduced by the government under Prime Minister Nawaz Sharif, serves as the primary legislation governing agricultural income tax in Punjab. This framework is also followed by other provincial laws related to agriculture.

With the federal government aiming to introduce agricultural taxes by July 2025, this reform represents a critical opportunity to bring equity to Pakistan’s tax system and ensure that all sectors contribute their fair share to national development.

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