Taxing the agricultural income

Last year, the agriculture sector contributed Rs11.5 trillion to the national GDP, yet the total agricultural income tax collection across the country was less than Rs3 billion or 0.02 per cent of agriculture GDP. From the rest of the GDP, the Federal Board of Revenue (FBR) collected income tax of more than Rs1.7 trillion, which roughly amounted to 5% of manufacturing and services sector GDP. If the national agricultural income tax collection were at the same level, the government would have collected Rs575 billion, which is more than 200 times the current collection.

However, notwithstanding this unrealistically ambitious target, there is immense potential for increase in agricultural income tax that can be immediately realised with only minor reforms and addressing a few glaring anomalies.

Taxation of agricultural income is a provincial subject under the Constitution. Agricultural income is defined both under the provincial laws and the federal Income Tax Ordinance 2001, and primarily constitutes rents and revenues derived from land use for agricultural purposes. It even covers income derived from any building in the immediate vicinity of the land to cover poultry farms, livestock sheds, etc.

However, section 41 of the Income Tax Ordinance 2001 exempts the agricultural income from the federal income tax, leaving this space for the provinces to tax. All provinces therefore have their respective laws to tax agricultural income. In 2019-20, the total provincial agricultural income tax collection turned out to be Rs2.75 billion out of which about 74% came from Punjab, 22% from Sindh and merely 3% from Khyber-Pakhtunkhwa and Balochistan together.

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It is abundantly clear that this collection is quite low, but it becomes really interesting when this collection is viewed in conjunction with the fact that taxpayers claiming an exemption from federal income tax have to declare such income in their federal tax returns and confirm that they have paid provincial agricultural income tax on that income. In the year 2019-20, a large number of individuals claimed such exemption. The FBR data shows that more than 165,000 individuals declared exemption on agricultural income of over Rs82 billion.

Different provinces have different rates and slabs for taxing agricultural income, where small farmers having income below a certain threshold are exempted, while those with higher income have to pay a gradually increasing tax rate for different income slabs. The highest slab is 15% in case of Punjab and Sindh. Assuming an average tax rate of 10% on agricultural income claimed for exemption, the total agricultural income tax collection should have been more than Rs8 billion on the income in excess of Rs82 billion. This is almost three times as high as the present collection.

It seems that while a number or taxpayers are claiming this exemption, they are not paying their provincial dues, taking benefit of different tax jurisdictions and enforcement agencies. Those who do not get audited go scot-free.

Addressing this anomaly can be the first step towards optimising agricultural income tax collection and a simple way to do that could be the provinces outsourcing the agricultural income tax collection to the FBR. An alternative could be a data sharing arrangement between the FBR and the provincial boards of revenue.

Agriculture tax could be an important source of income, yet it has often been ignored. Many claim that such anomalies in the agriculture tax regime have also been used to whiten the black money. As Pakistan moves to change its fiscal trajectory through improving tax to GDP ratio, it should look towards such avenues to address leakages. This could be followed by more meaningful reforms, providing incentives for improving efficiency. Most importantly, such measures could help in documenting a big part of the economy.

Published in The Express Tribune, August 31^st, 2021.

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