ISLAMABAD: The four provincial governments have agreed to comply with the International Monetary Fund’s (IMF) demand to align the taxation of agricultural incomes with the federal income tax system starting from January 1 2025.

The provinces have also indicated their agreement to have the legislation prepared by the end of October. However, there is still uncertainty regarding the maximum rate of tax collection on agriculture income, with options ranging from 29 per cent, 35pc and 45pc.

One prerequisite for the new IMF programme is a shift in the tax policy on agricultural income. Finance Minister Muhammad Aurangzeb stated that the deal would be finalised this month as he assured the Fund of a change in the tax regime for agricultural income.

Official sources told Dawn on Thursday that the draft of the tax regime change on agriculture income had already been shared with the IMF. “There is a slight change in the text on agriculture tax of each province,” the sources said, adding that a few provinces have just mentioned the subject to the cabinet’s approval.

Uncertainty persists on maximum tax rate on farm income

In the negotiations on agricultural income before the budget, the maximum income tax on individual incomes was 35pc. However, the rate was increased to 45pc in the budget. “We are not clear whether the maximum rate will now be 35pc or 45pc for agriculture incomes of provinces”, the sources said.

The corporate income tax rate is 29pc. According to the sources, farmers can also start their corporations to benefit from lower tax rates.

Currently, the minimum tax on agricultural income is 15pc in Sindh, while the maximum rate in Khyber Pakhtunkhwa is 17.5pc. In Sindh and Punjab, annual farm revenue up to Rs1.2 million is tax-exempt. However, this exemption limit will now be Rs600,000.

The total revenue collection under agriculture income tax (AIT) is between Rs3bn to Rs3.5bn per annum.

This decision is predicted to produce two results. One, the AIT on agricultural incomes will rise to double digits, while individuals who previously declared their incomes under the federal income tax framework will now be taxed. It has become common practice for business owners with agricultural revenue to park their other incomes in the agricultural income category to receive reduced rates.

According to sources, the provincial revenue board will collect the tax. However, provinces have warned that agricultural produce is not a typical business and that climatic factors influence the outcomes. It was also said that agriculture’s net revenue would be calculated after removing agricultural produce expenditures.

According to the sources, the four provinces have agreed to amend their AIT regimes to fully align them, through necessary legislative changes, with federal personal income (small farmers) and corporate income (commercial agriculture) tax regimes. The provinces have also agreed to fully remove any exemption on income from livestock activities by the end of October.

Each province will begin collecting agricultural income tax under this new regime on January 1, 2025. It was also agreed that if any province finds initial implementation difficult before the required deadline, it will ask the Federal Board of Revenue to collect AIT on its behalf under this new regime until it builds its revenue-collecting and administration capabilities.

According to the agreement, aligning income tax regimes will improve the tax system’s fairness by taxing agricultural revenue in the same way as other income.

Published in Dawn, July 12th, 2024