A study undertaken by CBR to assess what impact it would make on revenue generation if agriculture tax was computed on actual income from the sale of agricultural produce, instead of being levied on the basis of the size of the land holding, has revealed that an amount of Rs 268 million has so far been collected from all the four provinces as agriculture tax.
The province-wise break-up, quoted in a Recorder Report, indicates that despite being the agricultural heartland of the country, Punjab has contributed only Rs 252 million, while Rs 6 million and Rs 10 million have been collected from Sindh and NWFP respectively, with Balochistan's share being nil.
The study, which includes data analysis for the last three years, has been started to calculate the quantum of tax it will yield if agriculture tax collection powers are transferred from the provinces to the federal government. CBR authorities believe that they can collect Rs 60 to Rs 70 billion per annum from the farmers.
The government is understood to have decided in principle to recover agriculture tax, and the issue is expected to be finalised during the next financial year. The present yardstick of the size of land-holding as the sole basis for computing agriculture tax is riddled with anomalies, which have at times been used as a convenient tool to avoid paying the tax.
For instance, the levy of provincial tax is the same for orchards producing fruits once in a year, and other orchards producing seasonal fruit repeatedly in one year. This means that the type of land-holding is as important as its size for calculating the quantum of agriculture tax to be levied.
Secondly, the non-irrigated area of up to 25 acres is exempt from tax, while irrigated area of up to 12.5 acres is exempted from tax. Likewise, in the irrigated category the land tax of Rs 150 per acre is applicable, while in the case of seven-year-old orchards the rate of land tax is Rs 350 per acre per annum. Such loose categorisation of land holdings has created room for tax evasion.
The huge shortfall in the quantum of agri tax collection is clearly appalling, and needs to be overcome. The focus of the new strategy is to broaden the tax-to-GDP ratio, which is one of lowest in the region. Agriculture accounts for nearly 22 percent of the GDP, which puts it ahead of many sectors of Pakistan's economy.
Further, agriculture contributes to the country's GDP growth as supplier of raw materials to industry as well as a market for industrial products, which is a major sources of our foreign exchange earning. We believe that just as incomes below a certain level are exempted from tax in non-agricultural sectors, the same principle should be applied to agricultural income.
Some pro-tax analysts have rightly advocated taxing agriculture on the grounds of horizontal equity, ie individuals in equal economic position should be taxed equally. Besides, income tax is imposed on personal income and not on sectors as a whole.
Many sectors of the economy often experience bad times, but this does not mean that persons belonging to these sectors should be exempt from paying taxes. As we have argued earlier in this space, the principle of "horizontal equity" should be applicable to all types of income, regardless of its source. Exemption of agriculture from tax serves as a disincentive to those who pay taxes.
This also raises the possibility of tax evasion by showing income from non-agricultural sources as agricultural income. Many individuals connected with agriculture earn huge personal incomes, and there are no legal or ethical grounds for not taxing their income.
There is said to be considerable evasion of income tax by those having both agricultural and non-agricultural incomes, a part of their non-agricultural income often being shown by them as agricultural. Yet another reason why agricultural income should be taxed is that Pakistan's tax-to-GDP ratio, which stands at about 9.4 is one of the lowest in the world. (It is 20 percent in the US and 34 percent in the UK).
According to one report, President Musharraf has in principle approved the blueprint for raising the tax-to-GDP ratio, which CBR chief had submitted to him recently. It would be in the larger interest of the country if the tax-to-GDP ratio is enhanced to bring it at par with that of other countries in the region.