Punjab government's initiatives will set trend for other provinces

From KHALID BUTT, Lahore
May 23 - 29, 2005

The agriculture, which is the largest income generating segment of Pakistan's economy, continues to enjoy freedom from federally administered income tax on the pretext that taxing agriculture is a provincial subject.

The Punjab government in a bid to find ways to shape the income generated by the agriculture under the domain of income, has decided to replace the flat rate of agriculture Income Tax with the income-based Income Tax mode of collection.

If the provincial government of Punjab succeeds in its reform based initiatives, the huge agriculture sector besides contributing more revenues in future would set a good example for other federating units to bringing the agriculture income into the tax net.

The proposed plan would enable the Punjab government to impose more agriculture income tax on the big landlords and affluent farmers, whose annual income is much greater than the ordinary farmers.

At present the provincial government is charging a fixed rate of agriculture tax that is based on the size of land Rs150 per acre for the agriculture land exceeding 12.5 acres and not exceeding 25 acres and Rs250 per acre on agriculture land beyond 25 acres. But the provincial government is in the process to start a major exercise of changing the flat rate of agriculture tax with income-based mode of tax.

"We have given a target to the Punjab Revenue Board to make arrangements gradually to replace the existing fixed tax with the income-driven mechanism of tax," Punjab Minister for Finance Sardar Hasnain Bahadur Dareshak told this scribe.

He said that the board had been asked to complete the required process within three years, starting from the coming financial year.

He further said that the board had also been asked to prepare the record of those landholders, whose agriculture land is adjacent to the canals and rivers as their income is much better than those, whose are located at the tail-end.

The Punjab Finance Minister further said that the landlords and farmers, who grow major cash crops, should be taxed more than others.

"I believe that the income of the growers of major cash crops and those who are close to the water channels is much higher than other farmers and they should pay tax according to their income and not on flat rate of tax," added the minister.

He said that the proposed change in the mode of agriculture income tax is part of the provincial government's strategy to enhance tax revenue to generate more resources in future and to minimize dependence on the National Finance Commission (NFC) award.

The minister also pointed out that in 2004-05 the target of agricultural tax collection had been set at Rs1.16 billion as against previous year's target of Rs1.03 billion.

It is learnt that during July to December this fiscal, total agriculture income tax revenue stood at Rs265 million Rs230 million in Punjab, Rs8 million in Sindh and Rs26 million in NWFP. The agriculture tax in Balochistan had not been enforced due to the backwardness of the province.

In 2003-04, the agriculture tax revenue of the three provinces amounted to Rs886 million Rs623 million in Punjab, Rs218 million in Sindh and Rs44 million in the NWFP province.

In Pakistan, total land area is about 803,940 square kilometers out of which nearly 22 million hectares are under cultivation. Around 70 percent of the cropped area is in Punjab, followed by 20 percent in Sindh, less than 10 percent in the North-West Frontier Province, and only 1 percent in Balochistan.

The statistics show that the Punjab province has an enormous potential of revenue generation in case the flat rate of agriculture income tax is replaced with the income-based mode of tax collection.

The significant move of re-shaping tax on agriculture income however seems a step in conformity to the guidelines provided by the multilateral donors who have strongly recommended enhancing revenue collection, reducing subsidies and public sector losses, increase public sector development program and increase funding to the provinces under the National Finance Commission (NFC).

Pakistan would have to increase its tax collection and reduce subsidies and losses of the public sector enterprises, particularly in WAPDA and the KESC if it wanted higher and sustainable growth.

The donor agencies including World Bank and the Asian Development Bank have asked the financial managers in Pakistan to set a more ambitious target of tax collection and further reforms in power sectors is the need of the hour.

Through the devolution plan, the public services efficiency should be enhanced at local level, the international lenders suggested. It is important that public services should be made accountable. The decision of Pakistan to leave IMF program was appreciated by them, however, the relationship would continue as IMF would continue reviewing Pakistan's economy and offering technical assistance in monetary and fiscal reforms.

The multilateral agencies while supporting the PRSP approved by the Pakistan government have said that it has provided solid framework for future reforms.

There would be a great need to enhance both public and private investment while maintaining fiscal stability. They have also appreciated the peace steps with India and described it as a welcome sign for the economy, however, continuity of economic policies and a further cut in debt is desirable.