ISLAMABAD: The International Monetary Fund (IMF) has recommended imposing a standard individual income tax rate of up to 45% on agriculture income as part of its multimillionaire dollar bailout package for Pakistan, which aims to stabilize the country’s chronically failing economy. This move could potentially eliminate the disparity in income taxation without requiring a constitutional amendment.
According to sources in the Ministry of Finance, the requirement is a component of the structural criteria the IMF has established for the next bailout package that Pakistan is discussing with the international lender. According to the sources, the global lender has set a deadline of October 2024 for changing the current provincial legislation to align them with the federal income tax law, subject to the new agreement being signed. Additionally, by October of this year, the IMF has requested that all income tax exemptions for the cattle industry be revoked.
The federal government is not allowed to tax agricultural revenue under the Constitution. Although the agricultural sector accounts for 24% of the GDP, it only contributes 0.1% of the total taxes collected nationwide. Nevertheless, the provinces are allowed to collect taxes from this sector.
The IMF has requested the provinces to simply adopt the income tax rates of non-salaried businesspersons, which can reach 45% of net income, without making any changes to the constitutional system.
Prior to the budget, the income tax rate for salaried individuals was 35% on gross monthly income over Rs500,000. Following the budget, this rate is now 35% on monthly income up to Rs341,000 and 39% on monthly income beyond Rs833,000. The new rate for non-salaried individuals is 45% of their net income, with a surcharge added to make it 50%. Adopting the ordinary individual income tax rate of 45% for agricultural revenue has also been mandated by the IMF.
The World Bank projected in a recent series of papers that Pakistan might levy agricultural income taxes equivalent to 1% of GDP. This amounts to Rs1.22 trillion based on the current estimated size of the economy.
According to the sources, most provincial governments have agreed to the IMF’s demand. They claimed that on Tuesday, the officials of the Sindh government met with the IMF delegation as well.
The Sindh government believed, during these sessions, that the highest income tax rate of 15% was inadequate for the agriculture sector, and that the rate ranging from 35% to 45% was excessive.
The highest individual income tax rate was set at 35% when the IMF began discussions with the province governments; but, as of July, the federal government has raised this rate to 45%.
