Taxing farm produce By Ashfak Bokhari

A SEMINAR on pre-budget public consultation by the National Assembly committee on finance and revenue held on February 19 in Islamabad singled out income from agriculture as one of the areas that needed to be urgently brought into tax net to beef up the falling revenue.

Two ANP senators were quite vocal in making the demand. This is a recurring theme on such occasions every year and the strident calls often end up with a promise from the government to introduce it from next year.

A similar pledge was made last year in April by the then adviser on finance Shaukat Tarin who said he was determined to tax all ‘no go areas’ such as agriculture, real estate and capital markets. The traditional feudal structure, he said, has been a major hurdle in the economic development and the country has to get rid of these ‘sacred cows’ to make progress. However, no such tax was proposed nor imposed.

Even before resigning from his finance minister’s job a few weeks ago, Shaukat Tarin, an ardent advocate of taxing rich agriculturalists, had again committed himself on February 13 to introducing tax on agricultural income from next financial year. The aggravating financial difficulties seem to have compelled him to do so.

The fact remains that the successive governments have failed to effectively tax income from this sector and the yearly collection under the land-based levy has remained below one billion rupees for more than a decade. Compared to this, there are 1.8 million salaried taxpayers who pay Rs27.4 billion in income tax.

Before signing the $7.6 billion loan programme, the International Monetary Fund has reportedly pressed the government to introduce agriculture tax ‘if it is serious about increasing the revenue’. The tax on farm products, the IMF said, was now unavoidable. And Shaukat Tarin had fully agreed with the Fund and promised to introduce this tax. In the past too, Pakistan had made such promises to obtain loans from the IMF but later wriggled out of them.

However, the IMF did not press for tax on agricultural income after sensing resistance to such a tax in the parliament dominated by the feudal elite. On November 28, after approving the loan, the IMF said it did not ‘envisage’ Pakistan putting a new tax on agriculture.

Agricultural income is defined by the law to include direct and indirect income from land. Rental income for the use of cultivated land, rent for a building on or in the vicinity of the cultivated land if the building is occupied by the cultivator or by the receiver of rental income from cultivated land are some examples of indirect income. Agricultural income, according to the FBR, is taxed by the provincial governments. If an individual enjoys agricultural income exceeding Rs80,000 then his income greater than ‘zero’ from all sources taken together (excluding agricultural income) will be chargeable to tax under the Income Tax Ordinance 2001. This method is similar to the one applied in India.

The tax on agricultural income has been a recurring issue in political and economic discussion. The issue often comes back to the agenda of the government when the demand for its imposition gathers momentum. However, what is required is a transition from the current system by first expanding the base of agricultural taxation and then putting in place a system of rural income taxation which would tax agricultural income in the same way as other income.

The oldest tax on agriculture has been the land tax or land revenue as it is known. Despite frequent changes in the structure of the tax, its collection system had remained fairly stable. The system contains elements of both pre-colonial and colonial land systems and some additions since the partition. In 1947, the land revenue systems in the provinces of Punjab, NWFP and Sindh were different in terms of methods of assessment. However, the West Pakistan Land Revenue Act of 1967 introduced a uniform basis for land revenue in the four provinces.

The main problem with the taxation of agriculture is that the revenue from it is very low. Incomes from agricultural activities have mostly been outside the income tax net. Other direct taxes collected from agricultural income are also negligible. In 1996, the actual collection of the main taxes on agriculture (charges on land and Ushr) was less than Rs2 billion amounting to less than 0.5 per cent of agricultural GDP. In 1981-87, the figures with comparable countries were 2.2 per cent for Malaysia, 4.6 for Argentina, and 6.3 for Chile. Most developing countries rely on land taxes and/or presumptive income taxes. But most agricultural incomes tend to fall below the exemption limits.

The 1999 World Bank report on agricultural taxation in Pakistan had recommended a three-phase approach to reform the system. In the first phase, the existing provincial agricultural income taxes would continue with a much lower exemption (five acres) while the land revenue will be discontinued. In the second phase, the income tax would switch to an Annual Rental Value or similar basis. However, the provinces would be allowed to develop alternate measures of the income to land if this was thought necessary. In the final phase, the income tax system would switch to a general income tax on presumptive basis.

In 1977, a bold step was taken by the then government. The Finance Act of 1977 repealed that part of the Income Tax Act of 1922 which exempted agricultural income from taxation. This change was part of the agricultural reform package – including the Land Reform Act of 1977 – offered by the PPP government just before the national and provincial elections in March 1977. Under the new system presumed income from agriculture would be determined on the basis of the number of PIUs per hectare.

After the coup d’etat in July 1977, the military government of General Ziaul Haq suspended the Finance Act of 1977 and restored the tax exemption on agricultural income in the Income Tax Ordinance of 1979. The question of changes in the direct taxes on agriculture, including land revenue, ushr and income tax, was examined by at least three expert committees in the 1980s. The majority view was against introducing a tax on agricultural income.

At the end of 1990, the Islami Jamhuri Ittehad (IJI) government appointed a taxation committee, which was in favour of a tax on agricultural income, but in its view the federal government lacked the constitutional authority to introduce such a tax. In December 1996, at the initiative of the caretaker government, each provincial government introduced an “Agricultural Income Tax Ordinance”, which were later modified. These measures could at best be seen as a step towards establishing “presumed” income from land as the basis of taxation.

Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/taxing-farm-produce-230