Agri tax far less than potential: All equity may be taxed equally: WB webinar

ISLAMABAD: Pakistan is collecting around Rs4 billion tax from agriculture income against the potential of Rs150 billion and there is a need for creating an environment that all equity may be taxed equally.

This was the crux of Pakistan Development Policy Series 2021’s fifth webinar of the series: Closing the Agricultural Tax Gap, organised by the World Bank.

While Pakistan’s large agrarian base contributes significantly to the real sector and employment, the share of agricultural income tax in Pakistan’s total tax revenue falls short of its true potential, the experts maintained.

Taimur Jhagra, provincial minister for finance and health, government of Khyber-Pakhtunkhwa (KP), Aamer Hayat Bhandara, farmer and co-founder of Agriculture Republic, Dr Hanid Mukhtar, former senior economist at the World Bank and Fellow at the Consortium for Development Policy Research (CDPR), Dr Tariq Bajwa, former secretary of Finance, Revenue, and Economic Affairs for the Government of Pakistan, former chairman Federal Board of Revenue (FBR), and Syed Zafar Ali Shah, senior member Board of Revenue KP addressed the webinar.

The session was co-chaired by Najy Benhassine, World Bank country director for Pakistan, and Dr Ijaz Nabi, chairperson of the CDPR and country director of the International Growth Centre (IGC) Pakistan.

Jhagra said that the provincial government has taken bold steps to increase the tax base and effectively, in many places lowering the taxes rates or trying to get people on board to increase their trust on tax system.

He said that the provincial tax revenue increased from Rs30 billion to Rs56 billion in two years i.e. Rs30 billion to Rs42 billion in the first year and Rs42 billion to Rs56 billion in the last year.

It never grew during the last few years before that, previously, the average revenue growth was less than five percent a year and now we have achieved 75 percent growth in two years, roughly around 35 percent a year over the last two years.

He further said that the previous reforms in taxes of Khyber-Pakhtunkhwa Revenue Authority (KPRA) of sales tax on services, property taxes, it helped in increase in tax collection and we are now trying few new things this year.

He said that the government has introduced steps in the agriculture sector. First, they have taken the land tax to zero. Effectively there is nominal payment for land tax which only contributed Rs70 million to the national exchequer. We have taken down that to zero and that means the small farmers do not need to bother with the Patwari anymore, he added.

Second, the exemptions limit for agriculture income tax was moved from Rs0.4 million a year to Rs0.6 million, while income tax regulations of the Federal Board of Revenue (FBR) are followed for other income tax payments.

Doing these two things, leaves us with the third element, where we believe between 40,000 to 100,000 individuals in the province, who will have to actually declare their agriculture income tax, compute agriculture income and cost, and actually revive the spirit of agriculture income tax, he added.

He said that these steps were taken in the budget and now we are working out to make it implementable.

We are not doing this just that our agriculture tax will become higher. We are not sure that the tax potential correlate to the agriculture GDP because across Pakistan the land owning is small, somewhere in 95 to 98 percent of agriculture and we have farmers with very small landholdings, who are actually doing agriculture to support their families, he added.

He said that they are not doing it for tax potential, primarily, they are doing it because it is the right thing to do and the principle is that if it is income tax it should be treated as income tax.

Bajwa said that the current agriculture income tax being collected is peanuts against the potential for the agriculture income tax of Rs150 billion.

We are collecting Rs3-4 billion from the sector. Equity demands that all income must be taxed equally and if equity is not equally taxed, loopholes within the tax system are created for tax avoidance and tax evasion.

He said that the agriculture lobby is strong and dominant in national and provincial assemblies and difficult to amend or legislate.

He said that the total taxes that are being paid by the agriculture sector including sales tax, and custom duty is around 20 percent, so they are paying taxes but it is only the agriculture income part that is not being paid.

The contribution of agriculture to GDP is 19.2 percent but the contribution of crops sector was less than seven percent.

The agriculture income tax laws only tax cultivated lands, so larger contribution to the agriculture sector is from the livestock sub-sector, he added.

Bajwa said that the total contribution of agriculture sector is close to around Rs3 trillion to GDP of Pakistan.

If we take seven percent of 19.2 percent, we are talking about Rs1,200 to Rs1,300 billion of crops sector contribution, and around 35-40 percent of farms of the total area should be taxed.

If 10 percent tax is applied to it then tax collection should be Rs120 billion and with 15 percent, it should be Rs180 billion, so around Rs150 billion should be the tax potential but we are recovering around Rs3 billion.

He said the FBR has started information sharing with the provinces and at least Punjab is getting information of these income tax payees, who have also declared agriculture income tax.

He further said that land record is not backed by national identity card and the system is difficult to catch the loopholes.

He said that taxing equally is a question of creating an environment, which compliance by all sectors and is the norm and not an excuse for one sector.

Nabi said agriculture is providing job opportunities and playing a large part of the economy but as a revenue base it has not the role as is expected.

For a variety of reasons, the total tax collection remains small even the potential is around Rs70 billion. If we were collect all the Rs70 billion it could constitute a large part of expenditures. It was not treated as standard income tax. It is more in nature of land tax. The provinces may lack the expertise to collect it as proper income tax, he added.

Benhassine through a tweet stated that the share of agricultural income tax in Pakistan’s total tax revenue is just 0.06 percent of GDP. agricultural tax falls short of its true potential, he added.

A tax on agricultural income can be an important source of revenue for an economy that is heavily reliant on agriculture, he added.

Copyright Business Recorder, 2021