Provincial governments have committed to aligning the taxation of agricultural incomes with the federal income tax framework as mandated by the International Monetary Fund (IMF), starting from January 1, 2025.
They intend to finalize the necessary legislation by the end of October. However, there is uncertainty regarding the highest permissible tax rate on agricultural income, with options of 29 percent, 35 percent, and 45 percent.
In discussions preceding the budget, the upper limit for individual income tax on agriculture was initially set at 35 percent but was later raised to 45 percent. There remains confusion over whether the maximum tax rate will be 35 percent or 45 percent.
According to the IMF’s directive, each province must start collecting up to 45% tax on agricultural income by January 2025. If any province cannot implement this revised tax, the Federal Board of Revenue will collect the tax from farmers and landlords until provinces establish their own tax collection mechanisms.
Currently, the minimum tax on agricultural income in Sindh is 15%, while it reaches a maximum of 17.5% in Khyber Pakhtunkhwa. Farms in Sindh and Punjab generating annual revenue up to Rs1.2 million are exempt from taxes, but this threshold will now decrease to Rs600,000. Annual revenue collection from agriculture income tax (AIT) ranges from Rs3 billion to Rs3.5 billion.
This decision is expected to have two main consequences: AIT rates on agricultural incomes will rise to double digits, and individuals who previously declared their incomes under federal tax frameworks will now face taxation. It has become common practice for business owners earning agricultural revenue to allocate their other incomes under agricultural income to benefit from lower tax rates.
