Tax on income from agriculture

All the multilateral financial institutions and most of the analysts have been urging upon the authorities since long to tax incomes originating from various sources without any discrimination. Thankfully, all the provincial governments are now convinced about the desirability of also bringing the agriculture incomes into the tax net which is supposed to be their domain and prescribed certain rules, but their half-hearted efforts in this regard do not seem to have made any headway. Although all the provinces are guilty of not giving enough attention to this source of revenue, yet a report in a reputed newspaper (Dawn) on the state of agriculture income tax (AIT) in Khyber Pakhtunkhwa (KP) is particularly disturbing due to the absolute lack of seriousness on the part of the provincial government to proceed in the right direction earnestly. According to this report, there are two taxes that apply to landholders in the province: one is land tax and the other is AIT. As per land tax slabs levied on the cultivated land, total land revenue should have been Rs 223.2 million during FY11 but the provincial government has projected the receipts from this source at Rs 21 million, out of which only one million rupees will be collected as AIT. The performance to collect AIT was so poor that in the last three years this source has contributed a meagre 0.02 percent, 0.1 percent and 0.3 percent to provincial tax receipts respectively despite the fact that annual income from irrigated land in Mardan was approximately Rs 10,000 per kanal, while the minimum was Rs 300 per kanal in the Karak district. Several factors could have contributed to the poor recovery rate of AIT in the province. The relevant laws and rules governing the AIT are confusing, giving the tax collectors enough space to discriminate between the assessees and indulge in dubious practices. According to the AIT Ordinance 2000, AIT had to be collected based on the assessment of incomes derived from landholding in a year while a notification issued in March, 2002 made filing of agricultural income tax returns compulsory only for those people who are in possession of more than 50 acres or have incomes from agriculture produce in excess of Rs 100,000. Under a 2005 KP government notification, only those landlords with cultivated land more than five acres were supposed to pay land tax on it. In addition to the ambiguity of the relevant rules generally applied on whims, the focal person, supposed to collect the AIT, is a patwari who is a four-scale employee of the revenue department and mostly dependent on indirect support from local landlords. It is not surprising, therefore, that as against 27,794 landlords who own land in excess of five acres in the province, only 100 are registered as AIT payers. Although, we don't have data for other provinces, the situation as revealed by various sources, does not seem to be much different from the one in KP. The basic reason for this is that most of the political leaders who are also lawmakers derive handsome incomes from the agriculture sector and are skilled, and often collude, in finding ways to exempt themselves from taxes. This results in overburdening other sectors with taxes, exacerbating income inequalities and depriving the nation of the opportunities of building infrastructure and improving growth prospects. Clearly, there is hardly any justification for keeping the agriculture sector exempt from effective taxation as indicated by the collection of only Rs 1 million in the whole year by the KP government. The latest State Bank's Annual Report released on 19th December, 2011 has again urged upon the relevant quarters to muster the political will to widen the tax base to include untaxed or under-taxed segments of the economy like agriculture and services if sustainable growth is to be achieved. In our view, there is no reason why transparent, effective and non-discriminatory laws cannot be enacted or the relevant tax machinery cannot be properly trained and utilised to collect AIT in order to reduce the dependence of the provinces on the federal government and ensure equity in taxation. The only missing link appears to be the selfish attitude of vested interests and lack of commitment at the highest level of the provincial governments. Unfortunately, such characteristics are not amenable to change easily. Copyright Business Recorder, 2011