The case for agricultural income tax

There is a need to capture potential income from agriculture and equalise the tax burden

The Eighteenth Amendment has brought about a major shift in fiscal dispensation in the country, with an enhanced provincial share in the federal divisible pool and more space for the provinces to mobilise their own sources of revenue. This shift has taken place in tandem with devolution of greater responsibility to the federating units. This has been in a number of key areas, like education, health, agriculture etc. Despite these shifts and added responsibilities, provincial efforts to broaden revenue streams have been poor, with not more than six per cent of provincial resources coping with the ever-growing expenditure responsibility. Simultaneously, the situation at the federal level does not look promising either, with a mounting debt burden threatening economic stability. This persistent trend has now crossed permissible limits with a debt-to-GDP ratio of 60 per cent, which violates fiscal responsibility and the Debt Limitation Act. Growing interest payments are further restricting the financial space and draining tax revenues, which could have been put to productive channels.
The given state warrants consistent efforts, both at the federal and provincial levels for making rational expenditure choices, while at the same time, expanding the revenue base through all available means. Now is the time to make the right decisions, rather than populist ones. The provinces need to look at their poor resource base critically and shed their inertia in this respect. In this regard, it must be noted that the proper imposition and collection of agricultural income tax has been ignored by successive governments because of the resistance of the powerful ‘farm’ lobby. Agriculture covers the areas of corporate agribusiness, and organic and tunnel farming, now run on commercial lines. The area needs to be brought under the tax net, but on account of ambiguity — whether agricultural income is taxable or not — there has been a legal gridlock for many years in this area. This sad state warrants a clear ruling on pending cases by our higher courts without further loss of time. According to a conservative estimate, based on agriculture’s contribution to the GDP, this tax has the potential of fetching around Rs200 billion to the provinces.

Agricultural income was brought under the tax net in all the provinces through legislation in 1997. It was, however, based on fixed rates for different slabs of ownership, which turned into a charge on acreage rather than on real earning. Despite upward trends in agricultural prices, the tax collected in this regard suffered decline. In Punjab, this collection dipped from Rs1 billion to Rs700 million over a period of a decade. This was understandable in view of fragmentation of holdings and application of the law of inheritance. In 2001, an amendment was made in the provincial laws introducing progressive rates of agricultural income tax on net income, while giving a choice to a tax returnee to pay his/her tax according to the income earned or in acreage mode, whichever was higher.
Section 3(1) of the Punjab Income Tax Ordinance 2002 stipulated that on holdings between 12.5 acres and 25 acres, owners were liable to pay at the rate of Rs150 per acre, whereas a holding beyond 25 acres was taxed at the rate of Rs150 per acre for un-irrigated and Rs300 per acre for irrigated area. As regards tax in the income mode, for income of Rs100,000, after subtracting overheads, it is  pitched at Rs5,000 and for income of less than Rs200,000, it is Rs5,000 plus seven per cent of the amount exceeding Rs100,000. The tax moves on to the higher end with progressive slabs as there is an increase in holding.
Despite empirical evidence of there being higher levels of accruals under the income mode, very few declarants prefer to opt for it, leaving space for staggering evasion, which is in-built into the system due to the faulty law. With poor enforcement of the law, not a single case of dereliction could be pursued ever since the dual provision was built into the law. In view of poor compliance and lack of demonstrable political will, this key area remains unattended while the government finds easy access to expensive credit lines, mortgaging the future of our children. It is time now to remove the anomaly in the law and gear the provincial machinery to measure up to the task. In Punjab, the government had agreed in principle to remove the anomaly in the law, but due to strong political resistance by the provincial legislators, the matter has been put on hold. The plea of the resistance lobby is that in view of rising input costs, the grower is in no position to bear further financial pressure of paying the agricultural tax in income mode. This is not tenable. Tax on agricultural income is to be calculated after subtracting all fixed and variable costs, including cost of inputs. The income mode makes provision for each activity and attendant cost, from weeding to levelling of the land, well before basic inputs are accounted for, like seeds, water, fertiliser, pesticide, harvesting and storage costs. It makes provision for all activities before arriving at net accrual for the purpose of taxation.
Firm decisions in this regard cannot be shelved for an indefinite period. There is a need to capture potential income and equalise the tax burden. A beginning could be made by introducing the presumptive mode of taxation to keep it simple, while avoiding serious issues of compliance. Provincial governments have to make a choice and must not dither under unnecessary political pressure. It is the provincial initiative one wishes to see. Publicly, Imran Khan has taken the lead here, as he so often talks of ‘tabdeeli'. Let him make a beginning in this regard in Khyber-Pakhtunkhwa and enforce agricultural income tax in substance setting an example for others to follow. Can he do that? This depends on whether he could outgrow the influence of those who are seen rubbing shoulders with him on the container.

Published in The Express Tribune, December 2^nd, 2014.

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