Time to tax farm incomes

The rapid shift of incomes to rural economy in the wake of soaring global commodity prices during the last couple of years has given fresh boost to demands for agricultural income tax for increasing the country’s abysmally low tax-to-GDP ratio of below 10 per cent. — File Photo

THE call for effectively taxing big farm incomes has gathered momentum in the recent years as the country strives to close the widening gap between its falling revenues and growing expenditure.
The rapid shift of incomes to rural economy in the wake of soaring global commodity prices during the last couple of years has given fresh boost to demands for agricultural income tax for increasing the country’s abysmally low tax-to-GDP ratio of below 10 per cent.
“The best time for taxing people is when their incomes are growing,” an official of the Federal Board of Revenue (FBR) told Dawn on the condition of anonymity. “When people are prospering and have cash in their wallets and bank accounts, they tend not to resist the effort to tax them. The rising levels of rural income offer an excellent opportunity for the provinces to effectively implement agricultural income tax to substantially increase their own financial resources for development,” he said.
His view is corroborated by the fact that some big landowners from south Punjab have dropped opposition to agricultural income tax. Shah Mahmood Qureishi, for example, had recently supported this tax.
Jehangir Tareen has been pushing for tax on incomes of growers for some years now. Both represent big landed families from south Punjab, where landholdings still remain substantially large unlike fragmented landholdings in the rest of the province.
“It is no longer an urban demand. Even big landowners are favouring tax on agricultural income,” the FBR official pointed out. “It will not be easy for the opponents of agricultural income tax in the assemblies to oppose its effective implementation,” he said.
Both Punjab and Sindh have implemented agricultural income tax for several years now. The total collection of this tax from the two provinces, however, remains less than Rs1 billion, far below its potential.
“The agricultural tax, in its current form, is an inefficient and inequitable levy. A flat rate per acre (based on produce index which is not updated in years) is charged from all growers who are not required to file tax returns. It also does not make any distinction between a small zamindar and a big landholder,” said a Punjab finance department official. “If revenue from this tax is to be enhanced effectively, it must be implemented on the income of growers and not on land,” he said.
Provincial authorities often blame lack of capacity as a major hurdle in the way of reforming agricultural income tax, saying its implementation required a lot of hard work and improvement in provincial tax administration. Others say the provinces could request the FBR to collect agricultural income tax on their behalf on the pattern of provincial sales tax.
“The FBR has the capacity, resources and expertise to collect this tax on behalf of the provinces. Meanwhile, the provinces could build their capacity by revamping their tax collection systems,” the finance department official said.
Finance Minister Hafeez Shaikh also told a pre-budget seminar in Lahore that if authorised by the provinces, the federal government could collect agriculture income tax on their behalf and return it to them. The other way for the federal government (to implement and collect this tax) was that the parliament amended the constitution to make agriculture income tax a federal subject, he said.
The “structural shift of incomes towards untaxed sectors” falling in provincial domain is worrying the country’s top finance managers because it is squeezing the federal government’s ability to increase tax-to-GDP ratio and broaden the base. State Bank of Pakistan Governor Shahid Kardar feels that quick steps are needed to broaden the tax base to benefit from the growth in the untaxed sectors.
With this shift of incomes away from the tax-paying sectors to non-tax paying sectors, the tax-to-GDP ratio is structurally destined to be hovering around lower levels, according to him. “The structural shift now needs to be addressed in the next budget. All sectors of the economy need to be taxpayers beyond a certain level of income irrespective of the source of income.”
The provinces have so far shown little inclination towards reforming the agricultural income tax. Sindh’s adviser on finance Kaiser Bengali, however, said that the province was working on a plan to raise revenues from this tax in the next budget. “I can report that Sindh is working on a plan to bring about certain changes in the tax to enhance revenue collection from it in view of rising levels of (rural) incomes on the back of escalation in commodity prices,” he said.
Punjab, nevertheless, does not appear in a mood to even make slightest change in the existing tax. “The matter is being considered by a committee, the chief minister has constituted, to find additional resources for income to make up for the loss due to rejection of American aid,” the finance department official said, adding that he did not expect the committee to come up with recommendations to make agriculture income tax an efficient and revenue generating levy.