Agriculture presently contributes around 23 percent of GDP (in FY 50 agriculture was 53.2%, industry was 9.6% and services were 37.2%). However, generally speaking, Pakistan is still being dubbed as an agricultural country even by many 'educated' persons, probably because almost 67.5% of the country's population is obliged to live in rural areas and agriculture 'engages' nearly 42 percent of the total workforce of the country but most of them are heavily under-utilised.
Another reason may be its direct and indirect contribution towards exports being our main source of foreign exchange earnings.
Cotton is a raw material being supplied to the textile sector which till FY 2004-05 has earned 67 percent of the export receipts and has employed 35% of the labour force. Raw cotton is also being exported. Other primary commodity exports include rice (basmati, Irri and others), fish, fruits and vegetables etc.
Currently, agriculture is also in the limelight because of the focus of many concerned quarters and our donors, including the World Bank and IMF on the issue of tax-to-GDP ratio.
It will not be out of place to indicate that debate on tax-to-GDP ratio must not serve a smoke screen. Our total GDP at the current factor cost is around Rs 6.130 trillion only with low per capita income of Rs 41008 (population figure taken for calculating this figure is around 152 million).
Per capita income in this respect is a misleading measure as in our country most of the wealth is concentrated in very small percentage of population while the majority is either living at subsistence level or even below it and at the same time continuously changing real and minimum world standards of life and its basic requirements should also be taken into account.
The figure of GDP is achieved, inter alia, through small contributions (droplets in bucket) of majority (economic periphery) of our huge 162 million-strong population, including working in informal sector (particularly in commerce and petty services) and in agriculture.
In economic terms, growth and development are two different concepts. Growth does not necessarily reflect the development. It may not even indicate growth in real and disposable incomes, and equitable distribution of economic gains; hence we must not always be inclined to jump on official bandwagon of our donors.
But, the main attraction of agriculture sector is in its size of population and the latter's economic and non-economic dependence on landlords and others, and which confers social, political and even spiritual clout on them. Hence, the issue of taxation of agriculture (personal) income mainly has its roots in such circumstances.
Besides, agriculture incomes have also been the source of 'unearned' incomes of many individuals and families, a tool of evading tax liabilities and concealing income while investing in assets, earning incomes from illegal transactions, covering fictitious loans and incurring expenditures out of incomes form other (taxable) activities eg from business, largely because there has been no proper method of calculation and assessment of agriculture income. On the other hand, legislators through income tax laws have been declaring it 'exempt' income. And here lies the main confusion.
STORY OF EXEMPT INCOME The legacy of declaring agricultural income as 'exempt' has its connections with Government of India Act, 1935, which declared it a provincial subject.
The Government of India Act, 1935, continued as Indian Independence Act, 1947 and remained law of the land with certain amendments in the new dominion till the promulgation of the first constitution of Pakistan in 1956. No change was introduced even by the 1962 constitution except that federal wealth tax was introduced and agriculture land was brought into its sphere in 1963.
In 1970, exemption of wealth tax was awarded to those who under the law were not to pay income taxes meaning thereby that practically all agricultural land was exempted from wealth tax and this continued till 1994 when exemption awarded was withdrawn and wealth tax on the agricultural land on the basis of Produce Index Unit was levied (Wealth Tax Act has been abolished with effect from first July 2001).
Earlier, through the West Pakistan Land Revenue Act of 1967 which was a copy of the Punjab Land Revenue Act of 1887, a uniform basis for land revenue was introduced. Later on, a flat rate system was introduced in Sindh in 1972 based on pre-determined value of the Produce Index Unit (PIU) calculated in 1940.
In 1975, exemption of 12.5 and 25 acres of irrigated and unirrigated land holdings respectively was awarded with higher rates for larger land holdings.
However, in 1977, for the first time federal income tax was introduced through Finance Act repealing part of the Income Tax Act of 1922 that exempted agricultural income from taxation.
This was based on PIUs and land revenue was suspended. However, the government of General Zia suspended Federal Income Tax on agriculture by suspending the Finance Act of 1977.
Further, in 1979, Income Tax Ordinance, 1979 replaced Income Tax Act, 1922 and provided definition of agriculture income vide section 2 (1) and declared it as exempt vide Clause (1) Part 1 of second schedule (relating to exemption to certain incomes, class of incomes and persons and class of persons).
General Zia also restored land revenue for Shia Muslims and non-Muslims and Ushr under Zakat and Ushr Ordinance of 1980 for Sunni Muslims. (Source: World Bank Report on Agricultural Taxation - April 1999 and IMF report on 'Taxing Agriculture in Pakistan').
CONCEPT OF CLUBBING Two provisos, later on, were introduced through Finance Ordinance, 1988 and through SRO 766(1)/88 dated 7-09-88 and were added to Clause (1) Part 1 of second schedule. These both provisos brought in the so-called concept of clubbing of agriculture income of director of company and other individuals whose total income consisted of or included income from business.
Agricultural incomes of these two categories of assessee's were being included only for rate purposes, yet it taxed the agriculture income to certain extent declared exempt other wise - an ultra vires action.
Now, tax payable will be calculated as under:
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Following illustration will help clarify the situation
Assessment year 98-99.
Rs
Income from business 35000 Below exempt limit
Agriculture income 35000 Declared exempt otherwise
Total 70000 Taxed @5%
Tax 3500 -
Tax credit due to 2000 Balance tax 1500
exemption limit
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Tax payable = tax on total income/total income * non-agricultural income
750 = 1500/70000*35000.
751
Looking at the above figures, it can be seen that although originally tax payable was calculated at Rs 1500 which was reduced to Rs 750 due to proration, however, assessee had still to pay Rs 750 which other wise would not have been payable as business income was below exempt limit and agriculture income was exempt under the law hence due to introduction of these two provisos agriculture income exempt otherwise was made taxable in case of above two types of assessee's.
In 2001, a new Income Tax Ordinance, 2001 was promulgated with effect from first July 2002 declaring 1979 Ordinance as repealed. This ordinance also declared the agriculture income as exempt vide section 41 of Income Tax Ordinance, 2001.
This time definition given earlier in section 2(1) of repealed Ordinance was copied in section 41 of the new Ordinance, however, two further additions were made to the law; section 237(2) (a) (i) authorised Central Board of Revenue to make rules even for agricultural income and clause 2 of division 1of part 1 of the first schedule provided for table of different rates for individual and association of persons having agricultural income resulting into Rs 7500 more tax liability for such persons if their combined taxable income was Rs 150,000 or more (compare para 3 of clause 1 and para 2 of clause 2).
It means that agricultural incomes have by way of clubbing been brought into domain of federal income tax. In fact, issue of tax on agricultural incomes have never been properly addressed and examined. Ignorance about legal provisions made the situation more complicated.
On the one hand, agricultural incomes as earlier mentioned were made provincial subject by Government of India Act, 1935 and till todate these are under provincial domain; hence federal taxation laws have been declaring it 'exempt'. On the other hand, no law since 1947 was promulgated by the provinces to tax personal agriculture incomes till year 2000.
LEGAL POSITION The 1973 Constitution provided in accordance with its article 70(4), two lists of subjects in fourth schedule and defined the scope of the legislation of the Parliament (National Assembly and the Senate).
The two lists are Federal Legislative List (part one and part two) and Concurrent Legislative List. The Federal Legislative List is exclusive domain of Parliament whereas concurrent list is common jurisdiction for both National and Provincial Legislatures.
However, in case of conflict legislation by the Parliament would stay and prevail over legislation enacted by the province(s). As there is no List for provinces hence all subjects not mentioned in the said two Lists form the residuary jurisdiction of the provinces.
Although agriculture, as usually understood, falls under the provincial jurisdiction but here is one more very important thing to note that the Constitution has specifically barred the national legislature to tax agriculture income vide entry No 47 of part one of fourth schedule.
It says, "Taxes on income other than agricultural income". It means Parliament can not even legislate on the issue of agricultural income unless constitution is amended as constitution in our country is supreme in contrast to the constitution of the United Kingdom where Parliament is supreme.
It, therefore, means that if Parliament can not legislate on the issue of agricultural income, it can not declare it as 'exempt' either; and also can not introduce clubbing provisions under the Income Tax law. If any institution or person does not enjoy any authority over certain subject, they naturally can not exempt it from any responsibility or liability.
A federal secretary of finance division can not grant leave to the employees of health department of Sindh government because s/he does not have the benefit of any legal authority over them. Parliament simply can not and need not to legislate on issue of motor vehicle tax, stamp duty tax and land revenue as these are provincial subjects and provinces are already exercising their authority over these subjects.
As regards the issue of (direct) tax on agricultural (personal) income, yes, there was no law enacted by the provinces till year 2000 hence the subject of tax on agriculture income is still being debated on electronic media, articles are being published in newspapers and magazines, speeches are being made from rostrums of ordinary and august gatherings concluding that, though, agriculture threw in 23-25 percent of GDP but was being declared exempt due to political reasons.
PROVINCIAL LAWS But now, at least, 'law' is there so discussion and debate should be focused on its proper implementation. As regards history of attempts to tax personal agricultural incomes, Taxation Committee in 1990 decided in favour of tax on agricultural incomes.
However, no progress was made in view of lack of constitutional authority in this regard. Subsequently, at least three committees - National Taxation Reform Commission (1986), National Commission of Agriculture (1988) and Committee of Experts on Taxation of Agricultural Incomes (1989) - were also formed at federal level to sort out the issue.
These committees did not find favour with the very idea of tax on agricultural incomes due to variety of plausible reasons discussed in these reports.
Nevertheless, the commitments made while negotiating the ESAF and EEF programmes with IMF proved to be determinant and instrumental to ultimately get the legislation enacted by the provinces during year 2000 (source: IMF report ibid).
IMF "Paper on Policy Analysis and Assessment" (PPAA/98/3) and World Bank (Report No 18935-pak) were also useful in this regard.
Hence, as far as the issue of legislation is concerned, it now stands settled as legislation in this respect has already been enacted for all the four provinces as under:
PUNJAB PROVINCE: "Punjab Agricultural Income Tax Act, 1997 which was amended in year 2000 incorporating changes as were made enactments of the other provinces.
SINDH PROVINCE: "The Sindh Land Tax and Agricultural Income Tax Ordinance, 2000) notified on 16th October, 2000.
NWFP PROVINCE: "North-West Frontier Province Land Tax and Agricultural Income Tax Ordinance, 2000" promulgated on 27th July, 2000.
BALOCHISTAN PROVINCE: "Balochistan Tax on Land and Agricultural Income Ordinance, 2000" promulgated on 30th June, 2000.
All the four laws essentially are identical particularly in terms of definition of agriculture income, charging sections and method of assessment etc.
Definition of agriculture income in all these enactments is the same as is given in section 41 of the Income Tax Ordinance, 2001. The only difference is that Income Tax Ordinance, 2001 declares it as exempt whereas these provincial legislations declare it as taxable hence section 41 of the Income Tax Ordinance, 2001 is simply superfluous, and needs omission along with the clubbing provision of the agriculture income in first schedule.
It must be made clear that all the above four laws provide for both the land tax and agricultural income tax vide their chapter II section 3 and chapter III section 6 respectively. Section 3 vide the first schedule gives the rates for irrigated, unirrigated land and orchards whereas section 6 of the laws vide second schedule notifies the slabs for agricultural income ie exempt limit is 80,000 and then there are various slab rates of 5%, 7.5% and 10% etc.
Concluding the article, I would, however, like to add that;
a) Policy-makers must not commit a mistake to shift emphasis towards industrial sector only as such policy had already cost the country a lot in early years of Pakistan.
Agriculture must not be ignored as we can not even feed our ever increasing population which currently is 162 million what to talk of growth, even and equitable development.
We are not Malaysia, South Korea or Turkey with a population of 24 (m), 48.4 (m) and 69.6 (m) respectively, with a strong industrial base and a different historical and geo-political perspective than ours.
What we require is to invest more in agriculture, its infrastructure and more importantly to adopt a revolutionary and un-traditional development model approach and put it on modern lines, particularly its livestock and fisheries sub sectors.
Research institutions for crop agriculture and its value addition for local and export needs presently are not working on state-of-art level and are miserably inefficient;
b) Although laws to tax agricultural incomes are now well in place the issue of implementation is an uphill task.
FOLLOWING MEASURES MAY HELP:
-- Presently, information on estimate basis is being provided by local revenue and relevant officials to provincial authorities and then it is passed on to federal statistics division and compilers of Annual Accounts.
-- Land records, which are presently handled manually and are available only at district level, should be computerised and be made available at even provincial and federal level. This may, interalia, help create a database and find out the individual, family and benami land holdings through out the country. A cadastral survey should be conducted and digitised.
-- Level of exemptions should be raised for small land holders which hold more than 50% of land in the country and are in absolute majority particularly in NWFP.
-- Big land holders, orchards, commercial crop and live stock farms, land taken on contract or lease particularly absentee land lords should be adequately taxed.
-- A task force which must include sub-committees of revenue official at provincial and district levels should be constituted to examine afresh the issue of agriculture in general and tax on agriculture in particular with a time frame of 12-15 months and with sufficient resources at their disposal. Present provincial agricultural income tax law is also general in nature and should be tailored accordingly. Task force after preparation of the report should circulate it for comments to all stake holders and then put it before a country wide scientific session for final discussion.
-- CBR and other relevant federal institutions may work as an agency and assist local revenue department in enforcement of the writ of the law.
(The writer is Deputy Commissioner of Income Tax Large Taxpayers Unit, Karachi.)
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