The first year of Pakistan’s unified agriculture income tax regime has exposed a stark gap between policy ambition and revenue collection.” The opening observation in a news analysis report captures the immediate outcome of perhaps the most ambitious provincial tax reform (sic) undertaken in recent years at International Monetary Fund’s urging. It was part of the National Fiscal Pact signed by the provinces with the federal government following the 37-month ~$7 billion (EFF) programme with the IMF, approved on September 27, 2024.

The figures reported in analysis reveal only one dimension of a much deeper problem. The perpetual failure of the provinces to tax “agricultural income” [as defined in Article 260 of the 1973 Constitution read with Section 41 of the Income Tax Ordinance, 2001] is not merely an administrative deficiency. It is a manifestation of the country’s constitutional political economy, where fiscal policy is often constrained by entrenched structures of power rather than the text of tax laws.

According to the report, about 445,000 taxpayers declared agricultural income of Rs 306 billion in their federal income tax returns for tax year 2025. Provincial governments provisionally collected only Rs 5.62 billion as agricultural income tax during fiscal year 2024-25. At first glance, this translates into tax collection of barely two per cent of the declared income. The numbers are alarming and still understate the scale of the challenge.

The Rs 306 billion disclosed before the Federal Board of Revenue does not represent Pakistan’s total agricultural income. It merely reflects agricultural income declared as exempt by persons who filed federal income tax returns.

A substantial number of individuals whose only source of income is agriculture do not file returns with the FBR because they fall outside federal income tax system. Their tax liability, where it exists, arises under provincial agricultural income tax laws, a system many never effectively enter.

Consequently, neither the declared income nor the tax collected provides a reliable measure of the country’s agricultural tax base. The actual gap between taxable agricultural income and revenue realised is undoubtedly much larger.

It is equally important to understand why agricultural income appears in federal income tax returns. The constitution assigns taxation of agricultural income to the provinces. Therefore, such income is excluded from federal income taxation. Nevertheless, taxpayers disclose agricultural income in FBR returns to explain the nature and source of funds, investments and expenditures.

Such declarations also acquire significance under the Income Tax Ordinance, 2001, where claims of agricultural income are linked with payment of tax under the relevant provincial law. Instead of treating these declarations as merely information filed before another authority, they should become the starting point for systematic reconciliation with provincial tax records. The absence of a seamless mechanism for sharing and acting upon this information remains one of the weakest links in Pakistan’s fragmented revenue system.

The disappointing outcome should not surprise anyone familiar with Pakistan’s constitutional political economy. The IMF-supported reform succeeded in persuading provinces to harmonise tax rates and enact similar legal provisions. It could not alter the political incentives that have historically prevented meaningful taxation of influential land-owning elites.

This distinction is critical. Tax legislation and tax administration are not synonymous. Legislatures can amend statutes within weeks, but revenue collection depends upon accurate land records, determination of actual income, integrated databases, competent tax administration, effective audit and, above all, political willingness to enforce the law without regard to social or political influence. None of these institutional prerequisites changed merely because harmonised legislation was enacted.

The report identifies many of these structural impediments: weak enforcement, political patronage, incomplete land records, entrenched patwari culture, inconsistent digitisation and continuing influence of large landowners. These are symptoms of a deeper constitutional political economy in which institutions often reflect existing distributions of economic and political power. Where those exercising decisive influence over provincial politics are themselves affected by agricultural income taxation, legislative reform alone cannot ensure effective enforcement.

The debate should not be misunderstood as an argument for taxing small cultivators. Most farmers operate on modest holdings, face volatile commodity prices, uncertain weather, increasing input costs and shrinking profitability. They already bear substantial indirect taxation through petroleum levy on diesel/ petrol, sales tax embedded in fertilisers, pesticides, agricultural machinery, electricity and transportation.

Sound fiscal policy requires protecting subsistence farmers while ensuring that large commercial farms, absentee landlords and high-income agricultural enterprises contribute equitably to public finances.

Horizontal equity requires that income should bear tax irrespective of its source. There is no constitutional or economic rationale for imposing increasingly sophisticated compliance obligations upon salaried individuals, documented businesses and withholding agents while allowing substantial agricultural incomes to remain inadequately taxed.

The objective should never be taxation of land; it should be taxation of actual net agricultural income on principles comparable to those applicable to other forms of income.

The provincial experiences reported by news analysis reinforce this conclusion. The Punjab has relied heavily on advance taxation. Sindh has shifted towards assessment-based taxation supported by digital verification.

Khyber Pakhtunkhwa has retained its zone-based regime. Balochistan continues to suffer from limited transparency. These divergent approaches illustrate that harmonised statutory rates do not necessarily produce harmonised administration or comparable revenue outcomes.

Pakistan’s fragmented tax administration compounds the problem. Separate federal and provincial revenue authorities continue to maintain different databases, procedures and enforcement systems despite dealing with overlapping taxpayers and related economic information.

Agricultural income taxation requires integration of land ownership records, banking data, crop procurement information, satellite imagery, income declarations and provincial assessments. Fragmented institutions cannot efficiently undertake this task. Information exists; institutional coordination does not.

The lesson extends well beyond agricultural taxation. Pakistan does not suffer from a shortage of tax legislation. It suffers from a shortage of political commitment to enforce existing laws against privileged constituencies.

Constitutional political economy teaches us that institutions seldom operate independently of prevailing power structures. Fiscal reforms introduced without corresponding institutional and political reforms inevitably become selective, uneven and incomplete.

Meaningful reform demands more than periodic amendments to provincial tax statutes. Pakistan needs an integrated tax administration capable of using information available across jurisdictions while respecting the constitutional distribution of revenues between the federation and provinces. Such a framework would reduce compliance costs, improve transparency, minimise duplication and strengthen enforcement without disturbing provincial fiscal autonomy.

The first year of the unified agricultural income tax regime should not be dismissed as an administrative disappointment. It should instead be recognised as a reminder that equality before the tax law cannot be achieved merely by harmonising statutory rates.

Unless all income — whether derived from agriculture, commerce, industry or the professions — is measured consistently, verified effectively and taxed according to the same constitutional principles, the burden of financing the state will continue to fall disproportionately upon those who are already documented, while substantial economic rents remain beyond the reach of effective taxation.

The writers are lawyers, adjunct faculty at Lahore University of Management Sciences and members of the Advisory Board of Pakistan Institute of Development Economics