“Taxing agriculture is a core component of the International Monetary Fund's new program for Pakistan and is critical to its success. If the commitment is not followed, the program’s success will be at risk”—Nathan Porter, the IMF's chief of mission for Pakistan, Pakistan’s IMF’s program ‘at risk’ if agriculture goes untaxed, Nikkei Asia, July 18, 2024
“At the same time, the provinces will take steps to increase their own tax-collection efforts, including in sales tax on services and agricultural income tax. On the latter, all provinces are committed to fully harmonising their Agriculture Income Tax regimes through legislative changes with the federal personal and corporate income tax regimes and this will become effective from January 1, 2025—IMF’s Press release No. 24/273, July 12, 2024
“Today, a mere 5% of large landholders in Pakistan are said to possess a massive 64% of the total farmland, while 65% of small farmers hold only 15% of the land (Nazeer 2015)”—Economy of Debt: Alternatives to Austerity and Neoliberalism in Pakistan [page 19]
“…..the agricultural and population census shows that one percent of farmers in Pakistan own 22 percent of all farm area”—Hafiz Pasha, On Equity and Happiness: UNDP at the Lahore Literary Festival , February 26, 2019
“Instead of filing Agricultural Income Tax returns with the provincial governments, the same should be filed with the FBR that should solely assess/receive tax returns for agriculture and transfer it to the provinces as per their respective share like the gas development surcharge. Equity demands burden of taxation should be same for all”— Dr. Kaiser Bengali
The provincial assemblies have the exclusive authority to impose taxes on “agricultural income” within their territories, except in areas that fall within the domain of the federal government, known as Islamabad Capital Territory (ICT), where right to levy all kinds of taxes rests with the National Assembly.
Entry 47, Part I of Federal Legislative List [FFL] contained in the Fourth Schedule to the Constitution of Islamic Republic of Pakistan [“the Constitution’] reads: “Taxes on income other than agricultural income”. It empowers National Assembly to impose taxes on income, except “agricultural income”. It also confirms that in terms of Article 142(c) of the Constitution, the provinces can impose taxes on “agricultural income”—except in ICT as mentioned in Article 1(b) of the Constitution.
Within the ICT, the National Assembly has the exclusive power to levy taxes on “agricultural income” as provided in Article 142(d) of the Constitution, which says: “Majlis-e-Shoora (Parliament) shall have exclusive power to make laws with respect to all matters pertaining to such areas in the Federation as are not included in any Province”. Thus, the National Assembly can enact laws, including ones relating to taxes on “agricultural income” in all such areas not included in any province.
The most pivotal question is how to construe and determine the scope of “agricultural income”. According to Article 260 of the Constitution, the expression “agricultural income” means, “as defined for the purpose of the law relating to income tax”. This is an exclusive/exhaustive definition, thus no other meanings can be assigned to it, except those contained for the purpose of the law relating to income tax, which at present is Income Tax Ordinance, 2001—section 41(2) of it exhaustively defines what is “agricultural income” as under:
“41(1) .....................................
(2) “agricultural income” means-
(a) any rent or revenue derived by a person from land which is situated in Pakistan and is used for agricultural purposes;
(b) any income derived by a person from land situated in Pakistan from-
(i) agriculture;
(ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by such person to render the produce raised or received by the person fit to be taken to market; or
(iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by such person, in respect of which no process has been performed other than a process of the nature described in sub-clause (ii); or
(c) any income derived by a person from-
(i) any building owned and occupied by the receiver of the rent or revenue of any land described in clause (a) or (b);
(ii) any building occupied by the cultivator, or the receiver of rent-in-kind, of any land in respect of which, or the produce of which, any operation specified in sub-clauses (ii) or (iii) of clause (b) is carried on, but only where the building is on, or in the immediate vicinity of the land and is a building which the receiver of the rent or revenue, or the cultivator, or the receiver of the rent-in-kind by reason of the person’s connection with the land, requires as a dwelling-house, a store-house, or other out-building.”
The above exclusive definition of the expression “agricultural income” is binding on the National Assembly and provincial legislations. They cannot go beyond it while enacting laws within their legislative competence, to either tax “agricultural income” or exempt it. Primarily the above definition, relevant for the purpose of Article 260 of the Constitution, covers the following incomes derived from a land situated in Pakistan by a person from:
(i) agriculture; (ii) performance/sale by a cultivator or receiver of rent-in-kind of any produce on which only ordinarily processes are employed by such person to render the produce raised or received or sold by the person fit to be taken to market; and (iii) any building owned and occupied by the receiver of the rent or revenue in the immediate vicinity of the land used as a dwelling-house, a store-house, or other out-building.
The historical issues related to taxation of “agricultural income” in Pakistan were discussed in detail in an article. In the wake of US$7 billion 37-month extended fund facility (EFF) agreement between Pakistan and International Monetary Fund (IMF) for 37-month Extended Fund Facility (EFF), taxation and collection of agricultural income tax (AIT) assumed renewed significance. As per requirement of the IMF, the provinces singed National Fiscal Pact with the federal government for taxing agricultural income from January 1, 2025, at the rates at par with federal personal and corporate income tax regimes. However, none of the provinces, after amending the laws to this effect, has yet established any portal to facilitate taxpayers!
Lethargy on the part of provinces is not due to lack of infrastructure as they are already collecting sales tax on services through automation and skilled staff. They can simply extend this mechanism for collection of agricultural income tax as highlighted by IMF in the following document:
“…. the provinces will take steps to increase their own tax-collection efforts, including in sales tax on services and agricultural income tax. On the latter, all provinces are committed to fully harmonising their Agriculture Income Tax regimes through legislative changes with the federal personal and corporate income tax regimes and this will become effective from January 1, 2025”— IMF’s Press release No. 24/273, July 12, 2024
The real challenge in collecting AIT is the political clout of absentee landowners. They are not paying income tax on their colossal earnings from this source, or making negligible contributions, whereas the small farmers, under perpetual debts, are burdened with multiple federal and provincial taxes. Those having economically unsustainable holdings are facing exorbitant costs of inputs (seeds, fertilisers, pesticides, insecticides, electricity, diesel etc.). With the ever-increasing prices of energy and petroleum products, AIT at par with prevailing personal/corporate income tax rates, accentuated severely through the Finance Act, 2024, not reduced under Finance Act, 2025, are going to impose unbearable burden on them.
The issue is lack of political will, demonstrated vividly by the powerful Punjab. Though there is no ambiguity in the law and cases decided in the Sub-Continent, since the introduction of income taxation, that any profits and gains arising from livestock is not “agricultural income”, shockingly the Punjab Assembly included it in the Punjab Agricultural Income Tax (Amendment) Act 2024 (XV of 2024). This was in utter violation of the Constitution as well as the non-inclusion of tax rates. Both flaws persist even today—the Punjab Finance Act, 2025 is silent about it. So much so, Punjab has yet not notified rates for taxing agricultural income for tax year 2025.
The prevailing framework of fiscal rights between the federation and federating units, remnant of colonial legacy, is a major contributor to many of Pakistan’s economic problems, as it concentrates resources and powers in the hands of privileged classes
Despite clear provisions of the Constitution and principle of equity, none of the provincial governments is inclined to collect AIT from the wealthy and absentee landowners at the rate applicable under the Income Tax Ordinance, 2001 on non-agricultural income.
Unfortunately, the federal government’s approach in not taxing “agricultural income” of the rich is no different within the federal boundaries of Islamabad, even though many wealthy individuals own agricultural farms and absentee landowners in rural areas of ICT are quite affluent. These landowners hold significant influence in national politics, federal and provincial assemblies. The law in force in ICT is Tax on Agricultural Land Ordinance, 1996 and the rates of tax it contains are ludicrous:
| S. # | USE OF LAND | RATES OF TAX |
| 1. | Any land under fruit Orchard or used for growing vegetable or flowers including flowers plants…………. | Rs. 300.00 per acre |
| 2. | Where the land owned by a person including land used as at 1 above exceeds five acres– (a) Irrigated land………………. (b) Un-irrigated land………….. | Rs. 50.00 per acre Rs. 25.00 per acre |
The Constitution empowers the National Assembly to levy income tax on “agricultural income” within the federal limits, but no law has been enacted for this purpose until today. This is because influential members of elites, who are favoured by the state with agricultural lands as reward/award and profit from renting them out, wield considerable influence over elected governments and live opulent lifestyles at the expense of poor peasants.
According to an op-ed of 6 February 2020 by a former federal secretary: “This [agricultural] sector is almost one fifth of the economy (18.9%) and generates more than $60 billion or 9 trillion rupees worth of gross income annually…”. There exist many misconceptions about the share of the agricultural sector [23.54 percent in the fiscal year 2024–25] as a whole in the GDP vis-à-vis the component of “agricultural income”. Many think that crops are the main output of the agriculture sector, which in reality is less than ten percent of GDP!
According to the Economic Survey 2024–25, “In FY 2025, important crops accounted for 17.82 percent of the value added in the agriculture sector and contributed 4.19 percent to the national GDP. Meanwhile, other crops contributed 13.88 percent to agricultural value addition and 3.27 percent to GDP”.
It needs to be emphasised that only “agricultural income” falls within the legislative competence of the provinces, while all other activities of the agriculture sector (livestock, poultry, forestry, cattle farming, fish farming etc.) are under the jurisdiction of the Federal Board of Revenue (FBR). How much tax it collects from these activities is not made public by the FBR! Even the most informed ones (sic) in our media and so-called intelligentsia have no idea as to what is “agricultural income” as per law and what is its real tax potential.
On the basis of the Agricultural Census 2010 by the Pakistan Bureau of Statistics, the Tax Expenditure Report 2020 of the FBR claimed: “If statutory slab-wise tax rates are applied on average income per farm for the six categories of farm sizes, the estimated revenue forgone due to this exemption comes to Rs. 69.5 billion annually”. It may be noted that farms smaller than 7.5 acres were excluded and Rs. 50,000 income per acre basis was assumed.
The four provinces, instead of levying agricultural income tax as per the Constitution and imposing progressive taxes like inheritance tax (estate duty), gift tax, wealth tax and capital gain tax on the wealthy class, collectively received Rs. 6997 billion in fiscal year 2024–25 from the federal government under the 7th National Finance Commission (NFC) Award. On their own, they collected a meagre amount of total revenues of Rs. 1760 billion, with tax revenue of only Rs. 1120 billion. The collection under the head of agricultural income tax in total tax collection was a mere 0.7 percent.
In the just ended fiscal year 2024–25, all provincial governments cumulatively collected Rs. 8.14 billion as agricultural income tax: (Punjab: Rs. 4000 million), (Sindh: Rs. 4000 million), (Khyber Pakhtunkhwa: Rs. 130 million) and (Balochistan: Rs. 10 million). The national potential could be up to Rs. 400 billion, as per various research studies, if agricultural income tax is imposed in accordance with the Constitution. Proper collection of this tax by the provinces could have significantly reduced the federation’s overall fiscal deficit besides improving the pathetic tax-to-GDP ratio of just 10.3 percent.
A viable solution to proper taxation of “agricultural income” is transferring it to the federal government and restoring to the provinces their pre-independence right of sales tax on goods, brazenly snatched by the first military dictator, as well as implementation of a federalised structure of tax administration for effective enforcement of tax codes.
The prevailing framework of fiscal rights between the federation and federating units, remnant of colonial legacy, is a major contributor to many of Pakistan’s economic problems, as it concentrates resources and powers in the hands of privileged classes who, in turn, support corrupt government officials because they safeguard their interests. If Pakistan aims to overcome these challenges, this entrenched partnership needs to be dismantled. To achieve this goal, empowering the people is imperative, rather indispensable.
This can be done by shifting the focus of power away from politicians and placing it in the hands of the elected people at the local government level, as mandated by Article 140A of the Constitution. Decision-making should be in the hands of the people, not government officials. Public representatives and government officials should be held accountable to the public, and powerful individuals and/or organisations should not be allowed to cover up their wrongdoings or manipulate them for their own agenda and self-aggrandisement.