Only 'agricultural income' as defined in the Constitution falls within the legislative competence of the provinces, while all other activities of the agriculture sector (livestock, poultry, forestry, horticulture, cattle farming, fish farming, etc.) are under the jurisdiction of the Federal Board of Revenue (FBR). How much tax it collects from these activities is not made public by the FBR! Even the most informed ones in our media and so-called intelligentsia have no idea as to what constitutes 'agricultural income' as per law and what its real tax potential is—Elite Capture and Tax Evasion: Pakistan’s Agricultural Income Tax Crisis, Friday Times, July 5, 2025.
On June 10, 2026, the federal government will present its annual ritualistic budget for fiscal year 2026–27. The International Monetary Fund (IMF) has already imposed revenue targets. As usual, the fiscal deficit is being cited as justification for additional taxation, and policymakers are searching for new ways to extract more funds from an already overburdened formal economy and people with lower and/or fixed incomes. The underlying assumption is that Pakistan suffers from inadequate taxable capacity. The evidence suggests otherwise.
The latest official tax expenditure report for fiscal year (FY) 2025 shows that revenue foregone through exemptions, concessions, preferential rates, credits, exclusions and special tax regimes was Rs. 2.435 trillion. The figure was deliberately understated (fudged!) by not including the general sales tax waived on petroleum products since March 1, 2022. The impact of zero-rating sales tax was Rs. 1,795.764 billion. In FY 2024, tax expenditure was reported at Rs. 3,879.202 billion by including GST forgone of Rs. 1,257.513 billion on petrol and diesel. Why did the method of reporting change in FY 2025? It raises serious concerns for fiscal federalism vis-à-vis Article 160 of the Constitution. It is fiscal high-handedness to deprive provinces of their lawful constitutional right.
Financing Smarter, Not More: Rethinking Pakistan’s Agricultural Future
Previous articles in these pages have highlighted how successive governments have preferred taxing documented businesses, salaried individuals and consumers while leaving vast reservoirs of economic rent untouched and granting exemptions and concessions to the rich and mighty. The result is a fiscal system that penalises productive activity and rewards privilege. No example illustrates this contradiction more clearly than agricultural rent in cash or kind. The moment agricultural taxation is mentioned in Pakistan, rational discussion usually ends. Large landowners present every proposal as an attack on farmers. Political parties retreat behind slogans about protecting agriculture. Governments choose expediency over reform. The consequence is that one of Pakistan’s largest sources of economic rent remains largely outside any meaningful tax framework, while the burden of financing the state falls increasingly on those who earn their income through labour, entrepreneurship and documented economic activity.
Distinguishing Agriculture from Agricultural Rent
The first step towards reform is to distinguish between agriculture/cultivation and agricultural rent. A landowner may earn substantial income not because he has increased productivity but because he controls access to land. The farmer self-cultivating a few acres in Punjab, Sindh, Khyber Pakhtunkhwa or Balochistan is not the subject of this proposal. Such farmers face rising costs of fertilisers, seeds, pesticides, fuel and irrigation. They are increasingly vulnerable to climate change, erratic rainfall and declining water availability. Their productivity remains constrained by inadequate access to finance, technology and markets. Agricultural rent is something entirely different. It is income derived from ownership of land rather than from productive effort. The distinction lies at the heart of classical political economy. David Ricardo, whose theory of rent remains one of the most influential contributions to economic thought, defined rent as: 'That portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil.'
Why The 2026 Harvest Is A Federal Failure, Not Four Provincial Ones
Ricardo’s insight was profound because it distinguished rent from profit. Profit rewards enterprise, investment and risk-taking. Rent arises because ownership of a scarce resource allows its holder to capture value generated by factors often unrelated to his own effort. A landowner may earn substantial income not because he has increased productivity but because he controls access to land. Adam Smith recognised the same phenomenon. He observed that landowners frequently enjoyed income without undertaking either the labour or the commercial risks associated with production. John Stuart Mill carried the argument further. He noted that increases in land values frequently resulted from the development of society rather than the actions of individual landowners. As populations grow, infrastructure expands, and markets develop, land values rise even when the owner contributes little to the process. Mill’s observation remains remarkably relevant for Pakistan: 'The ordinary progress of a society which increases in wealth is at all times tending to augment the incomes of landlords.'
Few economists pursued this argument more forcefully than Henry George. Writing in the nineteenth century, George argued that land values increase largely because of collective social effort rather than individual contribution. Roads, irrigation systems, markets, urbanisation, public infrastructure and economic growth all increase land values. The gains accrue privately even though the underlying causes are social. If Pakistan begins taxing economic rent more effectively, the country can reduce its dependence on distortionary taxation. George proposed taxation of economic rent arising from land ownership. Whether one agrees with his 'single tax' proposal or not, his central insight remains compelling: society has a legitimate claim over wealth generated by collective development rather than individual effort.
Pakistan’s experience illustrates this principle vividly. Over the past several decades, agricultural land values have increased enormously. Irrigation infrastructure funded by taxpayers, road networks financed through public expenditure, urban expansion and rising population densities have all contributed to higher land values. The Quiet Collapse Of Pakistan’s Agricultural Economy. Much of this increase reflects social investment rather than private effort. However, substantial land-based wealth remains undertaxed. This outcome was never the objective of the original tax framework. The Income Tax Act, 1922, inherited by Pakistan at independence, defined agricultural income as rent or revenue derived from land used for agricultural purposes and income derived from such land through agricultural operations. The exemption emerged in a colonial economy where agriculture dominated economic activity, and the measurement of farm income posed serious administrative challenges, as well as political considerations, as colonial masters, after land colonisation laws, created feudal and princely jagirs (huge landholdings). It was not intended to create a permanent sanctuary for landed wealth. Nor was it designed to shield agricultural rent from taxation indefinitely. Over time, however, a limited exemption evolved into a political instrument protecting some of the country’s largest concentrations of wealth. The distinction between cultivation and absentee ownership gradually disappeared.
Fiscal Consequences and Constitutional Issues
This distortion now carries significant fiscal consequences. Pakistan’s fiscal deficit is routinely presented as evidence of insufficient revenue. However, the same state that pleads fiscal helplessness continues to forgo trillions through tax expenditures and leaves major sources of economic rent effectively untouched. The burden falls elsewhere. The salaried class now faces oppressive taxation at source. Consumers pay high indirect taxes such as the petroleum levy embedded in prices. Businesses confront extensive documentation requirements and multiple withholding taxes. Meanwhile, large land-based rents continue to enjoy exceptional treatment. This is neither efficient economics nor equitable taxation. It is worthwhile mentioning that huge state-owned land tracts have been given as rewards or awards, gallantry awards or otherwise.
Heat, Drought And Floods Push Pakistan’s Farmers And Fishers To Breaking Point. The issue becomes even more important when viewed through the lens of constitutional political economy. Following the Constitution (Eighteenth Amendment) Act, 2010, provinces possess authority under Entry 50, Part I of the Federal Legislative List to levy capital gains and wealth taxes on immovable property, including agricultural land belonging to rich absentee owners. In the last 16 years, provincial governments have shown no interest in utilising these powers. Instead, they remain heavily dependent on transfers through the National Finance Commission (NFC) Award. Fiscal autonomy without fiscal responsibility inevitably produces dependence. At the same time, federal tax expenditures reduce divisible-pool revenues and thereby diminish the constitutional shares available to provinces. Citizens therefore pay twice: first through exemptions benefiting privileged groups and then through inadequate public resources for education, healthcare, infrastructure and local government.
Opportunity for Reform in Budget 2026–27
Budget 2026–27 provides an opportunity to address this contradiction. The federal government, working with provinces through the Council of Common Interests and the National Economic Council, should promote a new framework distinguishing cultivation income from agricultural rent earned by absentee landowners. Small and medium farmers should remain protected. Income derived from actual cultivation up to a certain level should continue receiving favourable treatment. Agricultural rent earned by absentee owners and large commercial organisations should be brought within an effective and progressive tax framework under the federal income tax regime. The objective is not punishment. It is fairness.
The proposal also complements broader tax reform. If Pakistan begins taxing economic rent more effectively, the country can reduce its dependence on distortionary taxation. Corporate income tax rates can be lowered. Personal income tax schedules can be simplified. Excessive withholding taxes can be abolished. Documentation can improve because taxpayers will perceive the system as more equitable. Time To Insure Pakistan's Farmers Against Climate Shocks. Tax policy should encourage productive activity while taxing unearned privilege. Our current system often does the reverse.
The debate surrounding agricultural rent is, therefore, about much more than agriculture. It concerns the future direction of the country’s fiscal system. One path preserves the existing model: higher indirect taxation, growing debt, periodic IMF programmes and increasing pressure on the documented economy. The alternative focuses on broadening the tax base through taxation of economic rents, rationalisation of tax expenditures and effective utilisation of constitutional taxing powers. The first approach perpetuates debtocracy. The second strengthens fiscal sovereignty.
Four days before Budget 2026–27, policymakers should revisit a lesson understood by Ricardo, Smith, Mill and George long before the emergence of modern taxation systems. A state seeking fiscal justice should tax wealth arising from privilege before taxing income arising from effort. Pakistan’s budget debate would become far more meaningful if it began with that principle. The message to policymakers is therefore simple: Tax agricultural rent of absentee landowners, not farmers.
