Taxing farm produce By Ahmad Fraz Khan

The government plans to levy value-added tax on agricultural produce and farmers do not seem to like the idea.

They are raising a series of objections and some of them are very valid ones. For example, they wonder whom the tax is going to benefit, why it is being done in an indecent haste, how government has decided the rate, what would be the growers’ recovery mechanism and why government does not sit with them to thrash things out?

Unfortunately, instead of answering the farmers’ concerns, the government is pushing the process through, ignoring farmers, industrialists, provincial governments etc.

The farmers’ dislike for VAT is based upon fears that it would burden the sector with additional 30 per cent taxation – 15 per cent tax on inputs and 15 per cent on outputs – pushing the cost of production correspondingly. This would turn the sector uncompetitive on international and regional markets.

It is also the all-embracing nature of VAT that creates fears among the farmers. They know that VAT would take out exemptions that have so far saved small farmers – who, incidentally, are over 90 per cent of the growers. Most of these farming families are already living on, or below, the poverty line. The VAT would only push them down the line, creating a social chaos in hitherto poor but peaceful rural areas.

The VAT now threatens to end that social safety net of small farmers. That is what makes it politically and socially more sensitive issue.

Why government wants to impose a tax on produce, which is purely meant for value addition. It generates additional fears, and trust deficit between government and people make the matter worse. As reflected by the name, the VAT taxes value addition, not produce. The government plans to bring even agriculture produce – cotton, to begin with – this only makes the farmers nervous about the tax itself, and the government planning.

In VAT regime, all stakeholders of value-addition chain pay tax at every stage and recover it from the buyers, ultimately burdening the end consumer. In case of cotton, the end consumer is a European or American citizen. How would the farmers recover their tax, even if they pay. So is the case of rice, which is an overwhelmingly export crop.
“The farmers may be able to recover money in case of vegetable, which are sold in domestic market but recovering money from foreign buyers is a question mark,” says Shahid Kardar – former provincial finance minister. The farmers would have problem recovering their money in case of cotton and rice. What makes the VAT case scarier for farmers is that payment is certain and collection is not. The VAT would definitely increase their cost of production, but recovery process of their money is not as clear as collection, he says.

The farmers also wonder for whose benefit the government is slapping the VAT on their sector. The sector is already absorbing 44 per cent of country’s labour forces,95 per cent poor farmers who own less than 12.5 acres of land and 40 per cent of population living below the poverty line. All these people would drop down the poverty line once the VAT regime takes hold. Who would then benefit? It would certainly not benefit farmers who would pay more and earn less.

The utilisation of tax money has never inspired confidence among people to pay. No one is satisfied with the way government squanders tax payers’ money to benefit a small class of politicians, bureaucrats and their cronies. Widespread individual and institutional corruption does not encourage people to pay taxes, leave alone higher taxes for official corruption.

They also question where these loans are being spent, which make implementation of the VAT necessary. Billions of dollars are being taken as loan and people’s lives are being made difficult to ensure repayment. But where are they being spent? The government has not financed even one project in the agriculture sector from over $10 billion in loans and grants it received over the last two years. But it is asking the farming community to ensure repayment of the loans it never benefited from.

They also consider the government guilty of importing a philosophy from a different set of circumstances and people and trying implant here without noting indigenous realities, and doing so with an indecent haste. Singapore took two years before implementing VAT and neighbouring India kept it on hold for one year while Australia discussed it for six years. In Pakistan, the government wants to do it in six months.

They consider the tax rate even ridiculous. Even in developed countries, like Japan, Malaysia, Switzerland, Canada and Australia, the VAT rate is not more than 10 per cent. Pakistan wants to start it with 15 per cent.

In the final analysis, the farmers want government to sit with them and discuss all ramifications that the tax would entail, take them into confidence before taking the final leap.

Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/taxing-farm-produce-150