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Default Taxation on Agriculture Incomes

‘Sound and fury signify nothing’

By Ashfak Bokhari

ONCE again, one hears loud suggestions for taxing the income of the feudal elite and other wealthy individuals from sections of the incumbent regime. Previously, it was Shaukat Tarin who was too unambiguous and unrelenting in making such demands.

But the current calls are circumstance-driven and may not go as far as to seek an end to the exemption of agricultural income from being taxed.
Instead, last week the government imposed sales tax and excise duty on farm inputs, continuing its regressive direct tax policies.

In recent months, Dr Abdul Hafeez Sheikh was conspicuous by his repeated statements asking for taxing the landed elites and other non-tax paying affluent sections of society. On December 6, he rationalised the shift in attitude by saying “it`s the need of the hour to levy taxes on the affluent segments of the society so as to generate funds to repay IMF loans.”
Earlier, on October 29, he had said the feudal class would have to pay taxes or the country would have to rely on more aid or loans. In other words, he is not keen to subject big farmers to taxes on the basis of equity to improve the tax culture, but feels compelled to do so to meet the IMF-fixed revenue target.

It is interesting to hear Shah Mahmood Qureshi, a big landlord who resigned recently as foreign minister, talking about the need for bringing agriculture into the tax net. He is also chairman of Farmers Associates Pakistan, which represents the interests of landed elite of Punjab and has been opposed to any tax on the feudal community. It was his sincere and honest opinion, he said, that farmers who were earning significant money should be directly taxed. `It is high time that local resources are mobilised with a view to avoiding shackles of the IMF,` he said.

Leader of the opposition Chaudhry Nisar Ali Khan, whose party MPAs had vehemently opposed tax on agricultural income in the Punjab Assembly in 2008, signalled a change in his thinking, if not in the PML-N policy, last year on the budget eve, by speaking in favour of imposing tax on farm income. “Every one who earns will have to pay the tax. There are many landlords and the feudal lords who earn millions but do not give even a single penny as income tax, so they should pay as the salaried class and all others pay the income tax on their earnings,” he said.

Meanwhile, the federal government formally asked the provincial governments last week to effectively tax agricultural income, real estate and wealth and curtail their expenditures by 30 per cent because Islamabad, owing to poor revenue collection, is unable to provide them their due NFC shares. The provinces are getting 22 per cent less revenue share than stipulated in the seventh NFC award. The word to note here is `effectively` because the provinces have not been diligently collecting the agricultural tax so far. The total collection by all the four provinces was miserably low in 2009. It was only Rs1.89 billion while the actual potential was no less than Rs200 billion.

Currently, the provincial governments do not impose or collect tax on farm income but charge a fixed tax on per acre basis. The charge is usually Rs150 per acre from the irrigated areas and Rs100 per acre from non-irrigated lands. This is an outright violation of the constitution which stipulates tax on agricultural income as defined in Article 260(1). It has been kept intact even after the 18th Amendment.

None of the provinces has followed Article 260(1) of the constitution which defines agricultural income and hence no tax on agricultural income has been imposed. Perhaps, it is because of the pressure of feudal lobby in the respective legislatures that every province is inclined to follow the old practice. The oldest tax on agriculture is the land tax or land revenue as it is known.

Agricultural income under the law includes 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 of the 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.

In October last year, the government is reported to have stopped its tax committee from exploring ways of taxing the agriculture income and asked it to only identify loopholes to be plugged to raise a few billion rupees for debt servicing.

Dr Abdul Hafeez Shaikh replaced a task force on taxation set up by former finance minister Shaukat Tarin with the Reform Coordination Group with a limited scope of only identifying loopholes in the existing taxation system. This was done because the government was facing strong resistance from landowners in the national and provincial assemblies to the proposal of levying tax on agricultural income.

The present system of agricultural taxation has created significant distortions and inefficiency in the economy. Loopholes in the system, especially the exemptions of income tax on agricultural income, have created opportunities for tax evasion on incomes earned from non-agricultural sources. For instance, residents in urban centres who earn income from investments in real estate and businesses can avoid paying tax on such incomes by declaring their income as earned from agricultural activities on rural land they own.

In 1977, the Z.A. Bhutto government`s Finance Act repealed that part of the Income Tax Act of 1922 which exempted agricultural income from taxation. It was a radical measure. Under the new system presumed income from agriculture was to be determined on the basis of the number of PIUs per hectare. But after the coup d`etat in July 1977, the military government of Gen Ziaul Haq suspended the Finance Act of 1977 and restored the tax exemption on agricultural income in the Income Tax Ordinance of 1979.

Source: Economic & Business Review, 21 March 2011, Dawn
Muhammad Ali Asghar
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