The government has assured the International Monetary Fund (IMF) that provinces will begin collecting Agriculture Income Tax (AIT) by July 2025. This will be accompanied by a 5 percent increase in the federal excise duty (FED) on fertilizer and a 5 percent FED rate on pesticides in the next fiscal budget (2025-26).
The IMF’s staff report for the Extended Fund Facility (EFF), issued on Friday, revealed that the four provinces have agreed to amend their agriculture income tax (AIT) regimes. These amendments will fully align the regimes, through necessary legislative changes, with federal personal income (for small farmers) and corporate income (for commercial agriculture) tax regimes by the end of October 2024.
Each province will begin taxing agricultural income under this new regime from January 1, 2025, with collection for the second half of the 2024-25 agricultural income starting in July 2025.
The Federal Board of Revenue (FBR) will provide the necessary technical assistance to any province that needs it to implement and assess this tax. This alignment of income tax regimes will increase the fairness of the tax system, as income from agriculture will be taxed in the same way as other income.
The provinces have also agreed to transition the services GST from a positive list to a negative list approach to combat tax evasion, effective from the start of 2025-26. This strategic shift aims to enhance transparency and reduce loopholes by ensuring that all items not explicitly exempted are subject to taxation.
The report revealed that the Federal Board of Revenue (FBR) will improve information sharing with provincial revenue authorities. Provincial tax reforms will include (i) the full alignment of their Agriculture Income Tax (AIT) regimes with the federal personal and corporate income taxes by October 2024, with implementation from January 1, 2025, and collection in July 2025; and (ii) the transition of GST on services from a positive to a negative list, which will take effect from the start of 2025-26.
The Tax Policy Reforms will focus on simplifying revenue collection and broadening the tax base while ensuring the progressivity of the tax system. Key measures include removing exemptions and preferential treatments to reduce distortions, such as moving all products at a 5 percent rate of GST to the 10 percent category by FY26, and efforts to transform the GST into a broad-based VAT.
The PIT reforms aim to make the income tax fairer by eliminating further tax credits and deductions, with the special regimes for exporters and construction and developers coming to an end. Furthermore, any new exemption will be granted based on a cost-benefit assessment.
Other tax policy measures include (i) moves to ensure equivalent taxation of all sources of income and (ii) the introduction of a single turnover-based registration threshold for both income and GST registration for all businesses, the report added.
The authorities recognize the importance of adopting robust tax administration and enforcement measures to address the current 3.5 percent of GDP compliance gap, predominantly concentrated in retail (1.1 percent of GDP), transport (0.7 percent of GDP), and real estate (0.2 percent of GDP).
Key measures include: (i) fully implementing the compliance risk management framework in large markets (Islamabad, Karachi, Lahore), including the use of third-party data, cross-checks, and data analytics (end-December 2024); (ii) continuing the implementation of the compliance improvement plan (CIP) to expand the tax net, targeting professionals and small businesses. Performance will be monitored via a QPC setting a floor on tax returns from new filers identified through the CIP; (iii) extending the Tajir Doost scheme to an additional 36 cities, with the performance of the scheme monitored via IT; (iv) implementing digital invoicing; and (v) enhancing the track-and-trace system, accompanied by control and deterrent actions to prevent smuggling and counterfeiting.
Furthermore, the tax authorities will establish a Tax Policy Office under the Minister to improve tax policy analysis and allow the FBR to focus on revenue collection, the report added.
