Taxation on agriculture income has been a debatable issue in Pakistan since long owing to its intricate democratic structure. Since our agriculture system is dominated mainly by large landholders, the elected candidates do not pass the necessary legislation to collect what is due under the existing tax laws in order to appease the feudal. The history dates back to pre-partition times when colonial rulers created and protected feudal loyalty and even today mainstream political parties show no interest in alienating feudal support. Agricultural income falls in the provincial domain and is subjected effectively to a tax on land. All the provinces together do not collect more than Rs2 billion. According to the latest annual report of the State Bank, this is 0.03 percent of the agricultural GDP. Estimates suggest that PKR 150-200 billion could be added to the system if the leakages are plugged.
In Pakistan, the tax performance of both the federal and provincial governments has historically been unsatisfactory. Agricultural taxation in Pakistan is a clear example of the country’s flawed taxation system. The subsidies in the agriculture sector outweighed the agriculture income tax reflecting persistent fiscal indiscipline in Pakistan. The agriculture sector is under-taxed and over-subsidized disproportionately benefitting large farm owners. This is because subsidies are applied per unit consumption, so small farm owners who consume less, get fewer subsidies, while large farm owners consume more units and get a larger share of the pie. Furthermore, agricultural exemption has resulted in tax evasion, as incomes from other sectors are falsely reported as agriculture income to receive exemptions.
There are many issues in implementing and collecting agriculture tax. First, not everyone deriving income from agriculture necessarily owns the land. Therefore, credible records of landowner tenures, sharecroppers, and tenants are required. Second, the absence of records on produce and farm gate prices and costs of agriculture inputs are major constraints for calculating taxable income and liability. In addition, there is no inexpensive or practical way to verify the agricultural income of individuals as almost nobody keeps records of farm revenue and expenses.
To improve their fiscal position, provinces in Pakistan must introduce a fair and equitable system of direct taxation in agriculture, especially for large landowners. Following are some of the policy recommendations in this regard:
- Pakistan can address its flawed agricultural taxation system by implementing a number of policies. A feasible starting point would be to gradually increase taxes on the most privileged one percent of farmers, who own over 20 percent of farmlands in Pakistan. As a result, the government would improve its budgetary position and acquire sufficient funds for social protection, input subsidies, price support, and enhancement of irrigation facilities. If the agriculture sector remains untaxed, the persistent strain of subsidies and low revenue may widen the fiscal imbalance.
- Farm income depends on many factors; including location, fertility of land, crop mix, inputs and technology used, market information, infrastructure, and access to capital. Provincial governments must consolidate and computerize land records with provincial Boards of Revenues and obtain individuals’ citizenship records from the National Database and Registration Authority (NADRA) in order to identify a potential tax base. In the second phase, this database should be consolidated with the Federal Board of Revenue’s National Tax Number database so that other business incomes and profits may not be illegally reported as agriculture income.
Reformation of the agricultural tax system in Pakistan will be a gradual process. However, it is a necessary undertaking if Pakistan wishes to improve the fiscal position of its provinces and strengthen its economy.