This article discusses the issue of availability of food for the poor at affordable prices, economics of agriculture and the misperception about the potential collection of tax on income from agriculture.
For this purpose, there is a need to go back to real time calculations and the comparative study of the environment and practices in an almost identical society like India’s.
India and Pakistan being former dominions of British colonial power possess almost similar socio-economic dynamics. There are many strong similarities. Both in India and Pakistan, a substantial (majority) of the population is directly or indirectly engaged in agricultural activities. Secondly, poverty levels are quite high in both the countries.
Many people are not able to arrange two square meals a day in either country. Thirdly, as a legacy of the Government of (British) India Act 1935, the Constitutions of both the countries stipulate that the Federal or Union government has no right to tax income from agriculture and such taxation is the sole prerogative of the Provincial or State governments.
Fourthly, there is a concept of Minimum Support Price (MSP) for major agricultural produce. All these factors require financial support for the agriculture activities to ensure availability of food for the poor. In India, there is the National Food Security Act 2013, which can be summarised as under:
The National Food Security Act 2013, also known as Right to Food Act, is an Indian Act of Parliament which aims to provide subsidised food grains to approximately two thirds of the country’s 1.4 billion people.
Although, Pakistan did inherit the distribution mechanism network of ration shops at Independence that continued to operate till the 1980s before it was abruptly scrapped by the General Ziaul Haq government; India, however, has persisted with this regime of providing subsidised food subsistence/security with further refinement of their Public Distribution System (PDS).
The Indian food security system operates under the aegis of union ministry of consumer affairs to distribute food and non-food items to the country’s poor at subsidised rates.
Major commodities that are distributed include staple food grains such as wheat, rice, sugar, cooking oil and essential fuels like kerosene, through a network of fair price shops (also known as ‘Ration Shops’) established in several states across the country. Food Corporation of India, a government-owned entity, procures and maintains the PDS.
In Pakistan, despite the high-level of poverty there is no such legally protected organised system after the scrapping of the system inherited at independence in 1947. There is a rudimentary ‘Ehsaas Ration Program’. In this writer’s view, it is not sufficient.
Keeping in view the increase in inflation, gradual stagnation of the economy and significant increase in poverty level, a law like NFSA (National Food Security Act) of India should be introduced in Pakistan. Pakistan’s politicians and economists do not appear to be sensitive to this important subject.
India is comparatively more developed than Pakistan insofar as taxation matters are concerned. Despite its organised taxation system and with proper documentation of the economy in India, the collection of income tax on agriculture income tax is still quite dismal. However, unlike Pakistan, most of the Indian states (provinces) have not levied tax on agriculture income.
So, in India, agricultural income is by and large non-taxable. In Pakistan, there are statutes to levy tax on agriculture income; however, effectively, there is no implementation for obvious reasons, which are described in the following paragraphs.
When the writer was the caretaker Finance Minister of the Province of Sindh in 2013, he could not find any proper department to collect agriculture income tax in the Government of Sindh. The task has been assigned to the Board of Revenue of Sindh, which is effectively a department dealing with land records. The status in Punjab is quite evident from the following statement:
The average figures for revised estimates for Agriculture IT for the last three years are PKR 2328 million. Next year the government plans to collect PKR 2825 million, which is 21% higher than the target of 2021-22.
In this writer’s view the crucial question is about the proper estimation of the potential of agriculture income tax. As proved in the following table there is a huge perceptual gap on this matter. The urban taxpayer believes that a very large sum that can be collected is not being collected.
This presumption is totally wrong. In the workings as given in the following paragraphs it has been proved that this presumption is not supported by facts.
In the following paragraph an in-depth study has been made of economics of agricultural income tax. This study is limited only for one crop being ‘wheat’, which is a major source of food for Pakistan.
It is noted in Pakistan Economic Survey 2022-2023:
During 2022-23, wheat was cultivated on 9,043 thousand hectares against last year’s area of 8,977 thousand hectares recorded an increase of 0.7 percent. Wheat contributes 8.2 percent value added in agriculture and 1.9 percent to GDP.
The production of wheat stood at 27.634 million tonnes compared to 26.208 million tonnes last year, a growth of 5.4% was observed in wheat production. Wheat production increased as the government has announced Kissan Package-22 to mitigate the impact of Flood-2022 losses.
The government has also increased Minimum Support Price (MSP) to Rs 3900/40 kg compared to Rs 2200/40 kg ensuring better economic returns to mitigate higher input cost.
In the following paragraphs two tables have been attached. These are ad-hoc estimates of agricultural income tax of the farmers and middlemen from only cultivation of wheat and activities upto stage of wheat flour.
Total production of wheat is around 27.634 million tonnes. With a Minimum Procurement Price of Rs 97.50 per kg the size of the wheat economy is around Rs 2,700 billion or 2.7 trillion. This is the major component of agriculture activity in Pakistan.
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Description Value and Volume
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National Production of Wheat 27.634 million tonnes
Total 27,634,000
In Kgs 27,634,000,000 kgs
Government Minimum Rs 97.50 per kg
Procurement Price per 40 kgs
Total value of wheat produced Rs 2,694,315,000,000
in the country say Rs 2.7 trillion or
2,700 billion
Value of self consumed 15% Rs. 405 billion
Available for sale Rs. 2,295 billion
Cost of production 85% x30% Rs. 586 billion
Income from wheat production Rs. 1,709 billion
Income earned by persons Rs 855 billion
less than taxable limit. 50%
Taxable income Rs. 855 billion
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Tax at the rate of 15% Rs. 130 billion
(rate as per provincial acts)
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The estimated income tax at 15 percent is Rs 130 billion from wheat production throughout the country. This estimation does not include any cost for the labour, which is generally not employed. If other major crops are added, it will not exceed 400 billion.
The estimated collection of Federal tax is Rs 9,000 billion. The fundamental question is whether or not there is a need to raise Rs 500 billion in a situation where the government is effectively providing a subsidy in the form of MSP and Ehsaas Ration Program.
The aforesaid working clearly shows that neither our policy makers are serious in determining the real potential of agricultural income tax nor our academics have done any proper study to determine the potential of taxable income in this sector.
The aforesaid table, which is the result of some preliminary work of the writer with the help of some students of an institute, reflects that unlike the general perception the potential is not what is generally stated without proper homework. This means that India is not wrong in not pursuing it despite the fact that its per acre yield is almost twice Pakistan’s.
The calculation as aforesaid has been designed on a simple basis that total value of wheat produced is Rs 2.7 trillion. Deductions are made for self-consumptions, cost of production and cases where income falls below taxable limit.
If these factors are adjusted then taxable income comes to around Rs 1,000 billion, which, if taxed at the present rate, will generate only Rs 130 billion. Is there any economic sense to undertake that activity? The persons involved in earning that activity are around 80 to 100 million people.
In the light of aforesaid working which is based on very crude data there seems to be no case to pursue the collection of agriculture income, except where the landholdings are exceptionally big. Nevertheless, the laws where this provision has been introduced are to be changed on India’s pattern.
Minimum Support Price and Tax
The above-mentioned calculation has been made on the basis that all farmers receive the MSP of Rs 3,900 for 40 kgs for their produce. This is not the case. This aspect has been described in the following paragraph. However, the general impression about the operation of MSP can be summarised as under:
The support price system needs to be revamped. While big farmers benefit disproportionately and consumers are often badly hit, the poor farmers do not benefit much from it.
The economics of agriculture and tax on agriculture income cannot be handled without taking into account the biggest market intervention being the Minimum Support Price as indicated in the Economic Survey at Rs 3,900 per 40 kgs.
India operates under the same system where matters are much more organised and transparent; however, the use of MSP for political purposes can be discerned from following announcement made in India ahead of elections:
Ahead of assembly polls in key wheat growing states, the government on Wednesday announced an increase in the minimum support price (MSP) of wheat by 150 to 2,275 per quintal for the 2024-25 marketing season.
The operation of the Indian system is described as under:
MSP Determination in India: The India Commission for Agricultural Costs and Prices (CACP) under the Ministry of Agriculture and Farmers Welfare recommends MSP for India’s major agricultural commodities.
CACP operates as a statutory body that prepares and submits reports about the pricing of products for Kharif and Rabi seasons and recommends MSP to the State and Central Governments.
The State Governments submit reports to the Central Government, which takes the final decision after considering the supply and demand situation of the agricultural produce.
The Indian government only buys as much as 25 percent of the grain produced in the country at the rate of MSP, while the rest of the remaining crop (75 percent) is sold at the market price.
Only 6 percent of the Indian farmers reap this policy’s benefit as 94 percent are landless farmers. The Government of India has a mechanism in place, and CACP recommends MSP for India’s major agricultural commodities.
Pakistan Institute of Development Economics in their original study on the subject stated:
Learning from Indian Experience: India has a well-established system to govern MSP and procure wheat. Pakistan can develop such a system to monitor prices regularly. Yet, the Indian system is skewed and gives benefits only to 6 percent of the farmers.
Similarly, in Pakistan, MSP only offers benefits to less than 5 percent of big landholders. In comparison, the remaining 95 percent of farmers either do not sell wheat or even sell at low prices (exploited by middleman due to corruption and rent-seeking
The main recommendation has been for a while and remains true that the government should withdraw from the market. This would mean: (i) start by setting indicative pricing and stand back from procurement; (ii) withdraw from storage over a period of 5 years as private capacity develops; (iii) over a period of 5 years, in a stepwise fashion, withdraw import and export controls; (iv) liberalise spot markets to allow entry and competition through dissolving DC led markets; & (v) develop rules and standards for commodity (forward and futures) markets in key areas as storage develops. This will mean strengthening the Karachi exchange or developing rules for local exchanges.
Conceptually, agricultural income tax and MSP cannot go together for the simple reason that MSP, in essence, is a subsidy. Even on the financial side the expected collection does not make a financial sense.
This, therefore, means that subject of agricultural income tax is to be shelved for a period of five years and during this time period the MSP system in the country for major crops be arranged in the manner that the support of the government reaches the small farmers who are generally exploited by ‘Arthis’ and money lenders.
The real issue of agricultural income tax is the profit made by the middlemen, who get off scot-free due to this confusion. This aspect has been described in the following paragraphs.
The agricultural produce market factor
The primary problem of tax in Pakistan does not relate to agriculture as explained above. It effectively relates to the whole trade and industry of agricultural produce. In the following paragraph a very crude description has been made for only one industry being flour made from wheat so produced. This is not an agricultural activity.
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Description Value and Volume
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Wheat available for flour 27.634 million tonnes
-22.50%=21.416 million tons
Cost of wheat 2,098 billion
(Rs 97,500 per ton)
Other costs @ 15% 315 billion
Cost of flour 2,413 billion
Sale price 3,533 billion
(range 150 to 180 per kg) 165
Profit 1120 billion
Less than taxable limit 560 billion
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Tax at the rate of 30% 168 billion
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This is an economy of Rs 2.4 trillion which is totally out of books. Almost all the transactions are outside the banking and documented sectors.
There can be an argument that the average price of wheat flour is less than 165 per kg; however, the amount has not been reduced for the reason that in many cases, as indicated, the procurement wheat is not made at the MSP therefore the average profit of the middlemen is almost the same.
This amount of Rs 168 billion made by the middlemen does not go into state’s coffers. There is a small collection from the flour mills; however, the whole economy from the farmer to the supply of flour to the consumer is undocumented and does not contribute any tax to the exchequer.
In another sense it can be stated that the agricultural economy is only generating a taxable income of Rs 855 billion in the case of wheat with over 80 to 100 million people involved. Whereas the economy of agricultural activity undertaken by the middlemen of Rs 1000 billion with less than 8 to 10 million people.
There is a justification of state benefit or protection to the first group of people; however, there is no reason to subsidise the latter sector and exempt it from tax.
Conclusion
1-There is no proper estimation of potential of agricultural income tax in the country;
2-The provincial governments, who have the right to tax such income, are not interested in developing any proper database;
3-The estimated income tax from the agricultural activities throughout the country is not expected to be more than Rs 400 billion; there is no case to disturb the system where national tax collection is over Rs 9,000 billion;
4-The question of tax in the presence of Minimum Support Price is to be examined by economists;
5-India is not pursuing agricultural income tax for the reasons explained in the aforesaid paragraphs;
6-There is a substantial income earned by the agricultural middlemen, who are the real exploiters in the game. There is, therefore, the need to tax them adequately and appropriately;
7-Like many other subjects the question of agricultural income tax is being discussed without proper homework.
Copyright Business Recorder, 2023
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