Grappling with provincial reforms

The International Monetary Fund (IMF) considers the passage of the law for the introduction of agricultural income tax by all four provincial assemblies a landmark step and says that the Fund and Pakistan have agreed that a lot needs to be done on the ground for effective recoveries starting next year’s budget. The two sides will remain engaged over the next couple of months to address technical and procedural hiccups in aligning the four sub-federations.

In earlier briefings, IMF officials admitted that the progress in collecting agricultural income tax (AIT) would be gradual. According to a media report, the IMF mission was now more interested in the way forward on AIT collection and was engaging with provinces individually and jointly for clarity.

Listing various issues posing challenges to AIT collection, analysts at Dawn said it included capacity-building of revenue officials to assess farm incomes varying region to region and crop to crop and digitalisation of land records as a large part of the agricultural market functions outside the documented economy in cash. While it was important for the IMF to continue to insist on early enforcement, the analysts proposed that it must also help develop a comprehensive framework for implementation.

To quote Dr Hafiz A. Pasha, “Continued focus on the IMF Programme up to 2026-27 on tax reforms for the development of provincial taxes, combined with improved tax administration, could yield an additional 1.7 per cent of the GDP. It would lead to more than trebling of the current provincial tax-to-GDP ratio from 0.7pc of the GDP to 2.4pc of the GDP.”

“Overall, the ‘tax gap’ currently in provincial taxes is large. It is 0.8pc of the GDP in the agricultural income tax and 0.3pc of the GDP in property-related taxes. Further, expanding the coverage of the sales tax on services to other services could generate an additional 0.6pc of the GDP,” he notes in an opinion for the Business Recorder.

Analysts say, the centre and provinces must engage in meaningful dialogue on a new NFC award to craft a fairer, more efficient resource distribution framework

Increased provincial revenue mobilisation will enable substantially larger expenditure allocations for health, education, irrigation and social protection.

With the stipulated National Fiscal Pact between the federal and the provincial governments relating to the types of spending to be devolved, the expenses of the provinces are expected to go up.

According to analysts, it is time for the centre and provinces to engage in meaningful dialogue on a new National Finance Commission award to craft a fairer, more efficient resource distribution framework. In the first eight months of FY25, the total spending under the Public Sector Development Programme stood at Rs312.3bn, or 28.4pc of the Rs1.1 trillion earmarked for the year.

According to a media report, the IMF mission is now interested in engaging with provinces individually for clarity on AIT collection

Apart from the IMF efforts for inter-provincial coordination, some moves are also being made by the PML-N-led coalition government to ensure that the frictions between the centre and the federating units are reduced. The Khyber Pakhtunkhwa and federal governments have agreed on a framework to resolve the development fund-related issues of the province and its merged tribal districts, says Muzzammil Aslam, advisor to the KP chief minister of finance.

Addressing a news conference recently, Mr Aslam said the chief minister raised the issues related to the merged tribal districts, including delays in the release of the Accelerated Implementation Programme funds, in a meeting with Federal Planning and Development Minister Ahsan Iqbal.

The federal minister, who was also present on the occasion, said both sides agreed to resolve the issues through a joint mechanism.

Furthermore, Prime Minister Shehbaz Sharif recently said no decision on the contentious plan to dig six new canals to irrigate lands in Punjab’s Cholistan area would be made without taking its coalition partner (PPP) into confidence. The prime minister will head the committee to tackle the issue.

A day after President Asif Ali Zardari expressed concerns over the proposed canal projects on the Indus River in Punjab, PPP Chairperson Bilawal Bhutto-Zardari suggested that the controversial project be referred to the Council of Common Interests.

Speaking to media persons at his chambers in the National Assembly, the PPP leader said the one-sided policies made by the centre without consensus have put the government under strain, and they should be reviewed and resolved.

“We believe that we have to work hard in two phases, one aspect of which is collective farming,” says the PPP chairman. “If the provincial governments utilised the public-private partnership model to introduce smart irrigation, and the federal government funded this transition, then collective farming could become a revolutionary measure,” he argued.

Collective farming is a potentially useful approach for reducing inequality and transforming peasant agriculture. In collective farming, farmers pool land, labour, irrigation infrastructure, agricultural inputs and harvest to overcome resource constraints and to increase their bargaining power.

Published in Dawn, The Business and Finance Weekly, March 24th, 2025