IMPROVING RECOVERY OF AGRICULTURE TAX

TARIQ AHMED SAEEDI (tariqsaeedi@hotmail.com)
Sep 07 - 13, 2009

Improving tax collection from agriculture sector has been an earnest desire of tax collectors and successive governments that took attempts to improve recovery of agriculture tax, but to the chagrin of initiators, the attempts failed in the very begging or had to retreat due to lack of vigour on the part of legislators and planners. Total present tax potential from agriculture sector is not less than Rs70 billion, though total collection from it is not above Rs.2 billion per annum. That is also from levies and taxes on irrigated and non-irrigated farmlands.

Although agriculture income comes under taxing according to the Constitution 1973, the provinces have been recording poor recovery of income taxes over years. In fact, tax revenue from agriculture has been declining despite growth of the sector over a period. Agriculture sector weathered the economic slowdown in last fiscal year and witnessed increase in annual growth. Agriculture sector maintains an average growth rate of 4.1 percent since 2002-03 with variable annual growth rate from 6.5 percent to 1.1 percent. Contribution of agriculture in GDP is 21.8 percent. The contribution of agriculture in total tax is not over 1.5 percent whilst indirect tax to GDP ratio stood at 5 percent and direct tax to GDP ratio at around 4 percent during 2008-09, according to economic survey 2008-09.

Sales tax constitutes high share in total tax revenue. Indirect taxes comprising customs, sales, and excise account for 60 percent of total federal tax revenues. Federal board of revenue has tried several times to acquire mandate of agriculture tax collection, claiming that it could improve agriculture income tax, which according to the Constitution 1973 is a prerogative of provinces. Despite that, an amendment in constitution or insertion of legislation is required in order to transfer agriculture tax collection authority to federal government the central was itself probably cautious in taking responsibility of taxing agriculture, which though has immense tax revenue potential and with contribution of 21.8 percent to national GDP is swamped with diehard opponents of agriculture tax. The all-heard protests against agriculture tax in assemblies may have prevented agriculture tax reforms. Democratically, opponents outnumber proponents.

During the last government, when the state machinery in consultation with tax collectors were pondering over the ways to increase tax to GDP ratio and bring untaxed sectors in to tax net, Abdullah Yusuf, the then chairman of central board of revenue (now FBR) had requested former president Pervez Musharraf to transfer agriculture income tax collection authority to the federal government. Former president demanded spadework and assurance by CBR that it would be able to augment volume of agriculture income tax. It was reported at that. CBR was hell-bent on swelling annual collection of taxes from incomes of farmers to Rs 70 billion and promised to design blue-print accordingly. The former president also was said to have assured his complete support for a legislation improving agriculture income tax. The promise remained in air and so did the legislation.

Punjab and Sindh could generate substantial volume of agriculture taxes because of having concentrated highest agriculture activities in the country. Total provincial taxes stood at Rs40.4 billion for Punjab, Rs19.8 billion for Sindh, Rs.3.9 billion for Frontiers, and Rs1 billion for Balochistan during financial year 2008-09. Federal government wants to escalate tax to GDP ratio to 15 percent and plans to open up new sectors that can share burden of taxes. Since last government, the demand of making agriculture tax federal subject has not been raised again. However, federal government under duress of IMF loans programme and growing debt servicing obligations may need provinces to make effective their financial management so that public expenditures can extensively be transmitted to the provinces.

Last November, IMF recommended government to improve tax recovery from agriculture sector in order to shorten fiscal gap. Agriculture tax was a part of bilateral loan's conditionalities. But, the Fund had to soften its insistence on taxing agriculture when government officials told it about discrepancy of and difficulty in tax structure. The corollary was the removal of subsidies, tight monetary policy that thwarted decrease in interest rate, and cutback in reviewing time of petroleum's and electricity tariffs. Subsequently, all these festered economic wounds. Maybe, accepting IMF's prime demand of increasing agriculture tax would not have precluded other painstaking measures, nevertheless it could have somehow eased pain inflicted on public because of high indirect taxes.

Since many years, federal tax to GDP ratio has been faltering to cross 10 to 11 percent mark owing to structural weaknesses and unbalanced dependence on indirect and direct taxes. Agriculture tax can prove a resource bonanza, but there springs up hostile response from strong lobbies that disfavour agriculture tax in Sindh and Punjab every time the idea of agriculture tax is discussed in public. These lobbies draw power from numbers of government officials, parliamentarians, and politicians who have major stakes in agriculture sector. They are running sugar and flour mills and possess acres of farmlands. Government has to bow down before them since it could not canvass majority votes in favour of increasing agriculture tax. Ironically, government did not seek popular support while increasing GST to 16 percent.

Last year, Punjab assembly adopted a resolution against the imposition of agriculture tax. Reportedly, the members concluded that since famers were already paying provincial income tax, sales tax, water tax, and other taxes, any new tax would reduce farmers' income and be detrimental to provincial agriculture sector. It may give a point of argument to manufacturers who can then demand withdrawal of corporate tax for instance for they pay sales tax and custom duties to clear their consignments. The issue of agriculture income tax or say proper taxation of agriculture sector is unresolved because of exploitive landlords who are using farmers as bait to evade taxes.