In a major development, the government is considering imposing a federal tax on agricultural income to meet a demand by the International Monetary Fund (IMF) and legal experts say it is possible without amending the Constitution.
The proposal has been discussed between Pakistan and the IMF and a draft of the legal amendment has also been prepared, sources told The Express Tribune.
The sources added that the tax authorities have told the IMF that the legal amendment could be introduced in the 4th Tax Laws Amendment Ordinance.
The global lender has asked Pakistan to impose additional taxes including withdrawing sales tax exemptions by November 1 if Islamabad is keen to revive the $6 billion stalled programme.
The Express Tribune reported last week that Pakistan and the IMF had failed to reach a staff-level agreement within the schedule.
The finance adviser also rushed back to Washington on Tuesday, but then he, along with the finance secretary, left Washington on Thursday due to a disagreement on many sticking points.
Till filing of this story, the IMF did not issue a formal press statement about the outcome of the 6th review talks, which was initially expected to be released on October 15.
The sources said that during the review talks, a major demand by the IMF was to bring the agricultural sector under the federal tax domain.
However, the two sides were unable to agree upon the memorandum for economic policies (MEFP).
“The agricultural income can be brought into the federal tax net without a constitutional amendment,” Federal Law and Justice Minister Farogh Naseem told The Express Tribune.
The Federal Board of Revenue (FBR) chairman and the finance adviser have already taken up the issue with the law minister.
However, it is unclear as to whether or not Prime Minister Imran Khan would clear the proposal amid the increasing political and economic instability in the country.
Under the 1973 Constitution, the federal government could not impose tax on agricultural income as the matter fell in the provincial domain.
However, the provincial governments, over a period of time, shied away from the matter due to the influence of landlords.
The sources said the federal government in consultation with the law ministry has found a solution where the federal income tax can be imposed on the agricultural income by only amending the Income Tax Ordinance of 2001.
They said the tax authorities were considering restricting the definition of agricultural income to only income from “crops” by amending section 41 of the income tax law.
This would essentially bring income from rent on agricultural property and from livestock and fish farming under the domain of the federal income tax, they added.
The farm sector has a 19.2% share in the economy, according to the Economic Survey of Pakistan 2020-21. “Out of that, the share of crops production was only 4.6% of the Gross Domestic Product [GDP].
By amending the definition, the government can effectively tax 80% of the untaxed agriculture sector, the sources said.
Under the federal legislative list’s entry 47, “taxes on income other than agricultural income” are the domain of the federation.
However, Article 260 1 (a) of the Constitution read that the “agricultural income” defined for the purposes of the law relating to income tax -- which in this case is the Income Tax Ordinance of 2001.
The agricultural and the services sectors remained highly under-taxed that has put the burden on the manufacturing and the salaried class in addition to heavy indirect taxation.
The sources said that in the tax year 2021, people declared about Rs90 billion in their annual income tax returns.
Even by excluding one-fourth of it on account of income from crops, nearly Rs70 billion would fall under the domain of the federal income tax.
According to the FBR’s assessment, at least Rs120 billion additional annual incomes could be generated from the agricultural sector in the initial years.
Section 41 of the Income Tax Ordinance of 2001 read: “Agricultural income derived by a person shall be exempt from tax under this Ordinance, including from any rent or revenue derived by a person from land which is situated in Pakistan and is used for agricultural purposes; any income derived by a person from land situated in Pakistan from, the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by such person to render the produce raised or received by the person fit to be taken to market; or the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by such person, in respect of which no process has been performed other than a process of the nature described in sub-clause (ii); or any income derived by a person from any building owned and occupied by the receiver of the rent or revenue of any land described in clause or any building occupied by the cultivator, or the receiver of rent-in-kind, of any land in respect of which, or the produce of which, any operation specified in sub-clauses (ii) or (iii) of clause (b) is carried on.”
In August this year, FBR Chairman Dr Mohammad Ashfaq had sought provinces’ cooperation to catch big landlords, who had evaded taxes by declaring agriculture as the source of their income. The FBR chairman made the move after it came to light that more than 161,000 people declared their farm income of Rs79 billion in their federal tax returns.
In the tax year of 2020, a total of 161,069 filers countrywide declared an income of Rs79 billion from the agricultural source and claimed tax exemption.
In the tax year of 2020, about 128,550 people of Punjab declared Rs51.4 billion in farm income exempted from the federal income tax.
“I suspect that a bulk of such income has not discharged the provincial income tax liability,” Dr Ashfaq wrote to the Punjab finance minister.
According to the FBR, nearly 25,000 landlords from Sindh had claimed an income of Rs23.2 billion exempted from the federal income tax.
In K-P and Balochistan, 6,140 and 1,500 agriculturists had claimed an income of Rs2.7 billion and Rs1.5 billion exempted from federal tax domain, respectively.
However, the FBR did not receive any assistance from the provincial governments.
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