To expand its fiscal space for the next financial year, the government has three main options within the agriculture sector: impose new taxes on agricultural inputs, tax agricultural produce or farmers’ income, or rationalise the subsidies provided to the sector.

As the annual budget approaches, media reports indicate that the government is considering revising taxes on key agricultural inputs like fertilisers, pesticides, and seeds. During the last two decades, Pakistan has steadily shifted toward input-intensive agriculture, increasingly relying on chemical fertilisers, pesticides, herbicides, hybrid seeds, mechanisation, and improved crop irrigation to enhance crop yields.

However, the viability of agricultural farming in Pakistan is already under serious threat, driven by a sharp decline in commodity prices, rising input costs — despite a significant drop in input prices worldwide in recent years — and the worsening impact of climate change on crops. These pressures have severely eroded farmers’ profitability and purchasing power, as reflected in the steep decline in the sale of fertilisers, pesticides, and tractors over the past year. After so many years, the country is witnessing a surplus of over one million tonnes of urea (the most widely used fertiliser) now stockpiled in warehouses.

As a result, the crop sector has registered a steep negative growth, forcing the government to rely on livestock figures to project an overall positive growth rate for the agriculture sector.

Experts argue against agriculture taxation measures even as the government is reportedly considering revisions that could further burden farmers

Amid these challenges, the government is reportedly considering revising taxes on agricultural inputs. However, many experts argue that the government should avoid such taxation measures that undermine the overall agricultural production of the country, as they pose a grave threat to national food security and accelerate the country’s dependence on food imports — further straining already scarce foreign exchange reserves.

Alternatively, the government could consider taxing farm produce or agricultural income; however, agricultural income is already slated for a substantial increase in tax rates — from 15 per cent previously to as high as 45pc — effective from 2025.

Another viable strategy is to rationalise existing subsidies in the agriculture sector instead of imposing new taxes. For years, four major subsidies have supported the sector: government wheat procurement, subsidised canal water, concessional tariffs for agricultural tubewells, and discounted gas for fertiliser manufacturers.

This year, the government has discontinued its decades-long wheat procurement programme. While the system was marred by corruption and primarily benefitted large landowners, middlemen, and select flour mills, it still played a crucial role in stabilising market prices during the wheat harvest season. Its abrupt withdrawal led to a market crash in 2025.

Agricultural income is already slated for a substantial increase in tax rates — from 15pc previously to as high as 45pc — effective from 2025

Regarding subsidies to the irrigation system, the Punjab government last year raised the abiyana (canal water charges) by up to six times in one go, reaching as high as Rs2,000 per acre. Similarly, over the past three years, electricity tariffs for agricultural tubewells have been raised three times and are now nearly on par with industrial rates.

However, the multi-billion-rupee gas subsidy granted to select fertiliser plants purportedly for farmers’ welfare has failed to benefit the intended recipients. Despite notable differences in input costs, economies of scale, and gas pricing, fertiliser companies have continued to sell urea at nearly uniform prices. Recently, the Competition Commission of Pakistan fined them Rs375m for collusion and cartelisation. Given this, the government should withdraw this subsidy, which amounts to Rs24 billion.

A widely held misconception — one often reinforced by official narratives — is that agriculture in Pakistan is both tax-exempt and generously supported by the government. This perception has fuelled undue criticism and demands from different quarters to impose unrealistic taxes on agriculture.

Take the Punjab government’s Kissan Card scheme, which was presented as a Rs150bn support package in the media. It was essentially a loan scheme for 500,000 small farmers, with the government contributing just Rs9bn to cover interest. Likewise, the Green Tractor Scheme and the Solarisation Programme for Agri-tubewells have hardly a few thousand beneficiaries.

Similarly, the implicit taxation of the agriculture sector often goes unrecognised. This year’s wheat market crash — driven by flawed government policies — forced farmers to sell wheat at Rs2,000–2,200 per 40kg, well below the import parity prices. As a result, farmers effectively pay an implicit tax of Rs500bn, which has transferred from agriculture to other sectors of the economy.

Another example is the imposition of an 18pc general sales tax on locally produced cotton, while imported alternatives remain tax-free — an unusual policy not seen in any other country. This distorted pricing structure has caused reduced prices for farmers, amounting to yet another form of implicit taxation.

Globally, agriculture receives preferential tax treatment and subsidies due to its inherently high-risk nature — being vulnerable to erratic weather, climate change, perishability, and volatile market prices. According to the widely accepted risk-return principle, higher-risk sectors merit greater protection and returns. Notably, in agriculture, frequent losses are the norm, not the exception, in Pakistan.

In conclusion, with global commodity prices on a downward trend — expected to persist into the next year — and while input manufacturers and the government are unwilling to reduce prices in line with international markets, farmers’ challenges are far from over. Instead, their financial strain is likely to deepen, further weakening Pakistan’s already struggling agriculture sector.

Khalid Wattoo is a farmer and a development professional, and Dr Waqar Ahmad is a former associate professor at the University of Agriculture, Faisalabad.

Published in Dawn, The Business and Finance Weekly, June 10th, 2025