Once in a while, along comes a study that puts things in the right perspective. Titled, “Agricultural Taxation in Punjab: The Missing Billions”, by the Lahore-based Institute of Development and Economic Alternatives (IDEAS) is one such study.
While the study’s co-author Anjum Nasim has written about agricultural taxation before (in 2012 & 2013), the new study is based on improved methodology. Refreshingly, it offers an analysis of farming revenue potential in Punjab using four different modes.
The first three tax modes are based on Punjab Agricultural Income Tax Act (PAITA) 1997 and consist of: (a) a pure land tax; (b) a combination of land and income tax; and (c) a pure income tax. The fourth mode is based on Income Tax Ordinance 2001 (including annual changes in the budget), which shows the tax that farmers would have paid if agricultural incomes were taxed at rates comparable with incomes in non-agricultural sectors.
Now here is the punch line. It turns out if agriculture income was taxed on the basis and rates comparable to non-agriculture incomes (i.e. the fourth mode), the revenue potential for Punjab would have been Rs54 billion for FY14. However, the potential tax yield in the first three modes (a, b & c above) is estimated to have been Rs2 billion, Rs15 billion, Rs114 billion respectively.
Not many people follow this, but while agricultural land/income tax is presently collected mainly as a land tax, according to the authors, PAITA 1997 does make a provision of levying a full-fledged income tax on crop farming as well.
In their paper, Nasim and his co-author Hanid Mukhtar, offer details of how different PAITA rules could be interpreted to yield a combination of land-based and income-based tax on different farm sizes, and yet also yield ‘only’ income-based tax on all farms.
Those interested in the details of those interpretations can download the paper from IDEAS’ website, but in the meanwhile, here is an interesting bit of back-of-the-envelope calculation – and it is a crude analysis so it should be read with caution.
According to the central bank website, Pakistan’s economic output was Rs25,068 billion in FY14, of which Rs2,625 billion came from crops. Considering that Punjab, accounts for more than 65 percent of the production of most major crops in Pakistan, one could say that Rs1,706 billion of crop GDP (65% of Rs2,625 billion) came from Punjab’s economy.
Now even if Punjab was able to achieve its maximum farming tax revenue potential of Rs114 billion in FY14, even then its tax-to-GDP would have been at a 6.7 percent, much less than what’s popularly touted as healthy tax collection. (Mind you, if it were to be taxed based on ITO, the yield would be much lesser) (see tables)
That should settle the debate that big landlords are evading all the taxes. Of course, that doesn’t mean that big landlord shouldn’t be taxed. The principle of equity demands that taxes are paid by everyone, regardless of the source of income.
Indeed, as early as 1986, the report by the then National Taxation Reform Commission acknowledged that many industrialists and traders have purchased farming lands with the intent to whiten untaxed black income from the business by showing it as agricultural income. Also “many businessmen have entered into collusive arrangements with landowners; they obtain fictitious leases of land, from which they show enormous farming income which in fact is their business income and thus escape income tax,” the report pointed out.
Recall also that the first tax reform commission this country ever had was way back in 1949, called the Agrarian Reform Commission. And the third tax reform commission was in 1951 when the then Punjab government constituted Agriculture Income Tax Committee to examine “the question of the fairness of the basis of assessment of the tax”. Interestingly, that committee too had recommended the imposition of tax on agricultural income like a tax on income from any source.
“From any source”: this expression raises another important issue: the issue of livestock taxation. It is fashionable to say that agriculture makes up 22-24 percent of Pakistan’s GDP, but only 1 or 2 percent of its tax revenue. Even the latest report by the latest Tax Reform Commission also said that total collection agricultural taxes in FY14 was less than Rs2 billion whereas the share of agriculture in GDP was about 22 percent.
But the fact of the matter is within agricultural GDP, crops contribute 44 percent, whereas livestock sector contributes 52 percent – the rest is made up by fishing and forestry. Yet, no one talks about livestock tax potential, whether it exists or does not exist.
Intuitively, the tax potential from livestock may be low, because of small-scale farmers. But one should consider that with the rise of meat-eating and packaged-milk class and the growth in meat export industry, the livestock sector is gradually booming. It is booming to the extent that reportedly the likes of Fauji Meat Limited have not been able to source the desired number of animals per day to be able to kick-start their plant operations in Karachi. Therefore, it wouldn’t be too much to ask the academia and the third sector to at least study the tax potential of the livestock sector.
Anyway, there are various means and ways to reform the agricultural taxation as well as the bodies responsible to collect it – some of those suggestions have been discussed in IDEAS’ working paper and many elsewhere. But to conclude: no column on agricultural taxation should be written without highlighting the military’s role in agri taxation.
In the 1977 budget, under Abdul Hafeez Pirzada the then Finance Minister, the government had incorporated the provision of agricultural income tax based on Produce Index Unit (PIU) instead of land-based agricultural taxation. But weeks later there was an army takeover and the General Zia regime repealed this PIU based taxation.
Similarly, in 1997, agri income tax was imposed under Hafiz Pasha, who was then the Finance Minister, with a maximum rate of 15 percent on a net return basis, along with standard exemptions on agriculture income. But history repeated itself, and General Musharraf’s military regime reverted agri taxes from income-based to land holding-based taxes.
Suffice to say that in both cases, the military’s need to please big landlords to support the army government was a major motivation behind the abolishment of income-based agri tax, along with the fact that a lot of agri land – those mid-sized farms – is owned by army personnel themselves.
First published: March 21, 2016.
