While there is increasing demand at various forums to raise additional resources from the agricultural sector, the position on the ground is not only disappointing but continues to worsen with the passage of time. According to a summary prepared by the Finance Division for the consideration of the Council of Common Interests (CCI), it was pathetic to note that tax receipts from the agricultural sector had fallen as low as 0.8 percent of the total receipts of the provinces in 2009-10, as compared to 3.4 percent during the year 2000-01.
The dismal situation could be gauged from the fact that receipts from this source have declined even in nominal terms despite a sharp increase in agricultural incomes due to expansion in output and rise in the prices of agricultural products. Aggregate agricultural income tax of the provinces stood at Rs 1,243 million in 2000-01 while their total receipts amounted to Rs 36,917 million. By 2009-10, total provincial tax receipts had gone up by more than three times to Rs 111,974 million while agriculture taxes of all the four provinces had declined to only Rs 938 million. It was also frustrating to observe that agricultural taxes over the years have been falling despite continuing pressure from the international financial institutions and the promises of the provincial governments to mount the needed efforts. These amounted to 2.6 percent of the total provincial receipts in 2001-02, 2.2 percent in 2002-03, 2.3 percent in 2003-04, 1.6 percent in 2004-05, 1.2 percent in 2005-06, 1.2 percent in 2006-07 and continue to be at 0.8 percent since then. It was also sad to see that all the provinces have slowed down their efforts for mobilisation of agricultural income tax and are responsible for such a sorry state of affairs. Agriculture income tax as a percentage of total tax receipts in Punjab, Sindh and KP declined to 1.2 percent, 0.4 percent and 0.2 percent in 2009-10 as compared to 3.2 percent, 5.1 percent and 0.7 percent respectively in 2000-01. In Balochistan, the amount of agriculture tax was zero in 2009-10 as compared to 0.3 percent in 2001-02.
It may be recalled that several attempts have been made in the past to make at least a beginning in mobilising a reasonable level of tax revenues from the agricultural sector. For instance, all the provincial governments had promulgated agricultural income tax laws in 2000 to streamline the procedures for tax collection from this sector. Although the tax laws were almost identical, there were certain differences in rates of taxation and bases in each province, particularly under the 1st Schedule. However, under the 2nd Schedule of Agricultural Income Tax, the applicable rates were almost uniform. Under this Schedule, an income of Rs 80,000 was exempted from the tax, while tax rate of 5 percent was envisaged on total income if it did not exceed Rs 100,000. As is usual, progressive taxation was also applied with the rise in incomes from this source. For instance, where the total income exceeded Rs 300,000, an amount of Rs 22,500 plus 15 percent of the amount exceeding Rs 300,000 was to be collected as taxes. Actual tax collections show that provincial governments either don't want to confront the influential lobby of agriculturists or don't have the capacity to collect taxes. It could also be the result of complacency or a combination of all these factors. Provincial governments have not only not made any progress on the matter but even failed to make income tax returns mandatory for effective recovery of taxes on agricultural incomes.
However, whatever the reasons, the existing agriculture income tax policy and practice is now widely perceived not only as a distortion of country's tax system but also as an acute source of inequity. It is really mind boggling that while ordinary people like salaried persons comply with the income tax laws and are often harassed by income tax staff, agriculturists earning high incomes continue to be practically outside the tax net. Obviously, this is open discrimination between the sectors and individuals by the state and would further promote the culture of evasion and non-compliance. The problem has become more acute with the shifting of incomes and wealth from the urban to rural areas in the recent years due to the high prices of agricultural products. Also, the provinces need to make extra efforts for tax mobilisation after the 7th NFC Award because the Federal Government was struggling in meeting the country's debt servicing and defence needs and development expenditures should now be mainly the responsibility of provincial governments.
It must be recognised, however, that while the provinces have been quite callous, the Federal Government has been persistent in its advice and often offered assistance in capacity-building to mount the needed effort. The CCI had formed a committee, comprising finance and agriculture ministers, to suggest proposals for harmonisation of agricultural income tax a year ago and more recently the Federal Finance Minister had again raised the issue of provincial efforts for resource mobilisation, especially in the area of agricultural income tax during a quarterly meeting in December, 2010. The Federal Government is again convening a meeting of the NFC in the last week of this month to review the implementation of the 7th Award and push for uniform rates and strategy for effective imposition of agricultural income tax by the provinces in the next financial year. Hopefully, the provinces would be able to rise to the occasion and not only develop a consensus on the matter but undertake effective policies to really ensure equity in taxation and mobilise much higher level of resources to meet their increasing expenditure requirements. Failing this, the economy of the country would continue to suffer the consequences of a highly flawed and skewed tax regime.
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