Addressing a task force on private sector development last week, Finance Minister Shaukat Tarin reiterated his resolve to bring new services into the tax net, and announced that tax on agricultural income would be introduced in the next financial year. If history is any guide this would be his most daunting challenge.
Governments in the past have tried and failed to levy tax on agricultural income despite pressure from donor agencies. Even when the IMF had made it a condition for offering assistance, it too failed to achieve the desired outcome. The last attempt was made nearly nine years ago by the Musharraf government.
It had set up a special committee to make its tax proposals and, considering that tax on income from agriculture is a provincial subject, to synchronise provincial legislation on the subject. Implementation of the committee's recommendations was ordered, which required owners of more than 50 acres of land to file agricultural income tax returns, and that the income tax law should apply to those whose income exceeded the exempted limit of Rs 80,000.
This was a rather liberal tax regimen, yet it was seen as an important step towards creating an equitable taxation system. But like other attempts before it, this one did not go very far, either. Over the years, rich landowners who dominate the country's influence structures, have managed to keep agriculture incomes out of the tax net.
Powerful landowners in Punjab and Sindh have used their clout to have the provincial legislatures pass resolutions against imposition of agricultural income tax. They have also circumvented the land holding ceiling imposed under the land reforms. Meanwhile, slowly and steadily many members of the 'landed gentry' have also been setting up businesses in urban centres.
They take advantage of the exemption they enjoy as agriculturalists to evade tax on non-agriculture incomes as well. Other city-based business houses have been acquiring farmlands, too, to conceal their real incomes. Thus the activity is being increasingly used to deprive the national exchequer of the much-needed revenue not only from the agriculture sector, but also to cover tax evasion on other income from the liable to tax sector.
The Finance Minister has been repeatedly underlining the need to raise our tax-to-GDP ratio, which is abysmally low as compared to other economies in the region. Stating the obvious he emphasises that without enhancing the tax-to-GDP ratio, we cannot achieve the objective of prosperity or for that matter poverty alleviation.
The way forward is obvious too, which is to expand the tax base, and include in it the agricultural sector which accounts for much of the economic activity. Will he succeed where others before him have failed? That would depend on the government's will to counter the pressure the powerful agricultural elite are likely to mount whenever the Finance Minister introduces a concrete proposal to tax farm incomes.