The inevitable has happened. The subject of taxing agricultural income has been reportedly set aside by the tax committee for reasons that are already well-known. If the report holds true, this will be an outright case of criminal neglect in view of country's present state of immense fiscal stress.
Tax on farming income is a provincial subject under the 1973 Constitution, but that doesn't justify the federal government's behaviour of passing the buck to the provinces. This attempt on part of the federal government to come out unscathed is quite irresponsible; euphemistically speaking out of sense of crass objectivity - especially considering that international donors and lenders, and more importantly, taxpayers in the country, are visibly becoming agitated over government's own self-paralysing reluctance.
A more oppressive tax regime with negligible efforts to broaden the tax base gives more incentives for tax evasion. Existing taxpayers, who feel squeezed and believe that they are working harder and harder just to standstill, find grounds to express anti-tax sentiment on the premise that the rulers - mostly belonging to agricultural households - are not adequately taxing themselves.
This self-serving bias has had a long history in Pakistan nearly since the time of independence. The need to replace land revenue with agricultural income tax was recommended as early as in 1959 by the Taxation Enquiry Committee. The same was reiterated by the Taxation and Tariff Commission of 1964, and the Agriculture Enquiry Commission of 1972-74, all of which fell on deaf ears.
In the 1977 budget, under Abdul Hafeez Pirzada the then Finance Minister, the government incorporated the provision of agricultural income tax. But weeks later, there was an army take-over and the Zia regime repealed this taxation without making any announcement.
Similarly, 20 years later, in 1997, agri income tax was imposed under Hafiz Pasha, the then Finance Minister, with a maximum rate of 15 percent on a net return basis, along with standard exemptions on agricultural income. But history repeated itself; Musharraf's military regime reverted to landholding-based taxes.
Brilliant, visionary, and far-sighted he might not be, but he had an unerring ability to spot the interests of his constituency, the army, and the civilian landlords who had joined his government. Some opponents of farming income tax argue that agriculture by nature is a risky business, its income can fluctuate from negative returns in some years to very good incomes in others, and therefore, it should remain exempted.
But such volatility is the case in many businesses in today's globalised world, where the bottomline of many corporations move between green and red due to fluctuating commodity prices, cyclical interest rates and volatile currencies. The farmers, just like corporations, therefore, can get tax refunds in years of negative returns.
Others argue that the farmer is his own insurer to cushion against extreme natural calamities like pest attacks, or livestock losses, etc. But this can be mitigated by stepping up on crop and crop-loan insurance. The need to tax farming income cannot be overemphasised.
Over the course of years, especially in the last two years, the farming sector has seen windfall profits on account of relatively better mechanisation, higher yields, larger area under cultivation, higher support prices and a surge in global food prices. Yet, while agriculture makes up 22 percent of Pakistan's GDP, it hardly contributes 1 percent in the country's tax revenue.
Whereas the falling ratio of land revenue to the value added by crops speaks volumes of the need to implement agri-income tax, the fact that such a tax is necessary to reduce inequities in income distribution between big and small farmers strengthens the case. Plus, the land tax collection is not effective in nature and that exacerbates the anomaly.
Moreover, tax exemption for farming income creates room for tax evasion in other sectors of the economy. A 1986 report by the National Taxation Reform Commission acknowledges that many industrialists and traders have purchased farming lands with the intent to whiten untaxed black income from their businesses by showing it as agricultural income.
Also "many businessmen have entered into collusive arrangements with land owners; they obtain fictitious leases of land, from which they show enormous farming income, which in fact is their business income, and thus escape income tax," the report pointed out.
Taxing agricultural income, therefore, will also help in documentation of the economy. Even if the direct impact of taxing agricultural income might not be significant - Rs 4-5 billion at the most initially, according to former SBP governor Dr Ishrat Husain - agri income tax will improve the audit chain.
Plus, it will have a high symbolic value as it would increase public confidence on the rulers, and thereby reduce the trust deficit between the government and the governed. Faced with the fact that the government also provides subsidies (ie negative taxation) to the farming sector, and that the landholding records are very weak at the moment, the real challenge is to devise an actionable agri-income tax policy - one that is free from intrinsic distortions.
Until the time the sector is properly documented, which we believe the government must commence working on pronto, a presumptive tax regime on the sale proceeds of certain commodities like cotton, sugarcane and tobacco appears viable to start with.
When this PPP-led coalition government took office in 2008, the economic atmosphere was harsher than anyone expected, and it affected both the President and the prime minister so much so that they thought of themselves as victims. It was three years ago. Now they have got into the groove of their job in relation to country's economy.
They are, therefore, required to appreciate the fact that the taming of the fiscal deficit in particular through various measures, including imposition of agri tax, has to be done not only in a country with a traditionally anti-agri tax sentiment, but where the subsequent governments have embedded the resistance to agri tax deep into the culture of party in government and made the opposition party loath to take any action that might be viewed as making right noises for the imposition of agriculture tax.
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