The proposal to tax farm income shot down

By Masood H. Kizilbash



INCOME from agricultural activity has remained outside the federal income tax regime since the creation of Pakistan in spite of the formation of several committees, task forces and commissions in the past for the examination of the issue.
A ray of hope was rekindled recently when some of our parliamentarians vociferously pleaded for inclusion of the agricultural income in the budgetary proposals for 2010-11 at the federal level. As usual, the demand was spurned on questionable reasoning of the proposal as unconstitutional.

If the argument holds ground, one wonders why it was not made a part of the Eighteenth Amendment unanimously passed recently containing more than 100 amendments in the constitution.

One had hoped that in view of large fiscal deficit aggregating Rs680 billion and a pressing need for resources, the provinces might feel obligated for patriotic reasons to at least raise the rates of presumptive land tax to a level that a portion of growth in income from liberal upward revision in support prices of principal crops such as rice, wheat, cotton and sugarcane could be siphoned off for raising revenues. With the announcement of the provincial budgets this hope has also been dashed.

Agricultural income tax was introduced for the first time in1996-97 by provinces as a part of a “Reform Package”. The package was to be implemented in three phases. In the first phase beginning 1996-97, the provincial governments were to impose agricultural income tax on presumptive basis per acre of farm holdings with variations in rates between barani and irrigated land and exemption limits of 25 and 12.5 acres respectively.

During this phase a periodic downward revision of the exemption limits coupled with an upward revision in the presumptive tax rates was to be made so as to achieve a target of 0.5 per cent of GDP. In the second phase starting from July 1, 1998, agriculture income tax was to be assessed on the basis of “rental value of land” for which valuation table in each district was to be prepared. This phase was to last two years.

In the third and final stage, income tax was to be based on assessment of “total income” including income potential of land and income from other rural activi ties such as poultry, fish farming, forestry and livestock. In this phase a tax schedule similar to one used for non-agricultural incomes was to be developed for assessing tax on agricultural income.

It was estimated in May, 1996 that in the first year on the basis of “presumptive land tax” the revenue will increase to Rs2 billion in 1996-97 and to Rs4.4 billion in 1997-98 as against land revenue yield of Rs1.3 billion in 1995-96. In the second phase, with the “rental value of land” as a basis of assessment of tax, the revenues from AIT were to touch the level of Rs7.4 billion in 1998-99. In the final phase starting 2000-01, when assessment was to be based on income from land, land potential and rural activities, total tax revenues were projected between Rs40-50 billion or more than two per cent of GDP.

The implementation of the reform package over a period of 5-6 years remained a nightmare. For, as outlined in the package, what to speak of determining “annual rental value” of land in each district and calculation of presumptive income tax based on “gross value of production minus cost of production,” the provinces neither reduced exemption limits nor raised the rates of tax on land holdings despite manifold growth in income.

The result is that the combined provincial revenues from the so-called agricultural income tax will be around Rs2 billion in 2010-11. At this level it will be just three per cent of the total provincial tax revenues and just 0.015 per cent of the GDP as compared with benchmark land revenue of Rs1.3 billion or 11 per cent of total tax revenue and 0.06 per cent of GDP in 1995-96. It explains that instead of AIT proceeds going up over last 14 years of the reform package, they have continuously declined.

The crux of the matter is that political economy of the country is governed by a coterie of big landlords (Zamindars) sitting in federal as well as provincial parliaments. Upholders of status quo are always ready to nip into bud any move, aimed at reforming the fiscal management of the country.

However, what is painful is that with the People’s Party in saddle, it should have revived the Finance (supplementary) Act 1977 of Shaheed Zulfiqar Ali Bhutto under which it was “thought expedient to provide for taxation of agricultural income in the country on a uniform basis” - a progressive move stifled by the government of General Zia-ulHuq through promulgation of revised income tax law namely, Income Tax Ordinance 1979.