Pakistan’s failure to equitably tax agricultural income has deepened elite capture, worsened its fiscal deficits, and undermined both IMF commitments and the constitutional principle of equity.
By Dr. Ikramul Haq
Published: July 5, 2025 | Analysis | Main Slider
“Taxing agriculture is a core component of the IMF’s new program for Pakistan and is critical to its success. If this commitment is not upheld, the program will be at risk.”
— Nathan Porter, IMF Mission Chief to Pakistan, Nikkei Asia, July 18, 2024
“All provinces are committed to fully harmonising their agriculture income tax regimes with the federal personal and corporate income tax laws, effective from January 1, 2025.”
— IMF Press Release No. 24/273, July 12, 2024
Despite strong recommendations by the IMF, Pakistan has continued to exempt vast agricultural incomes from meaningful taxation—benefitting a tiny elite, aggravating fiscal shortfalls, and violating the principles of constitutional equity.
According to widely cited data, just 5% of large landowners in Pakistan control 64% of all farmland, while 65% of smallholders own only 15% (Nazeer, 2015). Similarly, the agriculture and population census reveals that 1% of farmers own 22% of all agricultural land (Hafiz Pasha, 2019). Yet, the taxation burden falls disproportionately on lower-income citizens, including small farmers who struggle under mounting debt and rising input costs.
A Constitutional Loophole or a Legal Shield?
The Constitution of Pakistan grants provinces exclusive authority to tax agricultural income, as stipulated in Entry 47, Part I of the Federal Legislative List and Article 142(c). However, in Islamabad Capital Territory (ICT), this authority lies solely with the National Assembly under Article 142(d).
Crucially, Article 260 of the Constitution provides a specific and exhaustive definition of “agricultural income” based on the Income Tax Ordinance, 2001 (Section 41). This includes:
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Revenue or rent from land used for agricultural purposes
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Income from cultivation and sale of produce with minimal processing
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Income from buildings on or near agricultural land used by cultivators
This definition binds both federal and provincial legislators—they cannot deviate from it to either widen or narrow the tax base.
The ICT Contradiction: Law Exists, Enforcement Does Not
Even within ICT—where the federal government has complete authority to tax agricultural income—no meaningful steps have been taken. The applicable Tax on Agricultural Land Ordinance, 1996 sets rates as low as:
| Use of Land | Rate |
|---|---|
| Orchards, vegetables, flowers | Rs. 300 per acre |
| Irrigated land (>5 acres) | Rs. 50 per acre |
| Un-irrigated land (>5 acres) | Rs. 25 per acre |
These token rates are not just outdated—they are a mockery of serious fiscal policy. Despite a clear constitutional mandate, the federal government has not enacted a proper income tax regime for agriculture in ICT, owing to pressure from powerful absentee landowners and elite interests.
IMF Requirements and Provincial Inaction
Under the IMF’s $7 billion Extended Fund Facility (EFF), Pakistan agreed to harmonise agricultural income tax regimes across provinces with the federal income tax framework, starting January 1, 2025. However, while provinces such as Punjab and Sindh have passed amendments, no province has launched a digital portal or enforcement framework for collection.
Notably, provinces already collect sales tax on services via automated platforms. Extending these systems to cover agricultural income would not require significant new infrastructure.
The Elite Capture Dilemma
The primary obstacle to reform is political resistance from wealthy absentee landowners. These elites earn substantial income from agriculture yet pay either no tax or minimal fixed charges. Meanwhile, small farmers bear the brunt of both provincial and federal levies, including inflated input costs for electricity, diesel, seeds, and fertilisers.
Shockingly, Punjab’s Agricultural Income Tax (Amendment) Act, 2024 attempted to classify livestock income as agricultural income—despite clear legal precedent and constitutional constraints—rendering it exempt. This not only violates the Constitution but also undermines equitable tax policy. Punjab has also failed to notify new tax rates for 2025.
What Is Really “Agricultural Income”?
Many mistakenly assume all agricultural-sector activities fall under provincial tax jurisdiction. In reality, only “agricultural income” as per Section 41 of the Income Tax Ordinance, 2001, is excluded from federal tax. Activities such as:
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Livestock and cattle farming
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Poultry and fish farming
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Forestry and value-added agriculture
fall under FBR jurisdiction, but data on taxation from these activities remains unpublished—underscoring a troubling lack of transparency.
Revenue Potential and Ground Realities
The Tax Expenditure Report 2020 estimated a revenue loss of Rs. 69.5 billion annually due to agricultural income tax exemptions. More recent studies estimate the national potential to be up to Rs. 400 billion, assuming full enforcement and realistic income assumptions.
In contrast, in FY 2024–25, the total AIT collected by all provinces combined was a paltry Rs. 8.14 billion, broken down as:
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Punjab: Rs. 4.0 billion
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Sindh: Rs. 4.0 billion
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KP: Rs. 130 million
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Balochistan: Rs. 10 million
This accounted for just 0.7% of total provincial tax revenue, despite agriculture contributing nearly 23.5% to the national GDP.
Reimagining Pakistan’s Tax Architecture
To solve this crisis, a comprehensive reform of Pakistan’s tax framework is essential. One viable model would involve:
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Centralising agricultural income tax under the federal government
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Restoring provinces’ pre-independence right to sales tax on goods
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Creating a unified national tax administration with decentralized enforcement
Such measures would align with the constitutional principle of fiscal equity, and improve Pakistan’s dismal tax-to-GDP ratio of 10.3%.
