A case for taxing agricultural income

It has become imperative to to restrict the scope of the tax exemption given to agricultural income.

Despite repeated demands for the imposition of direct tax on the personal incomes of well-off agriculturists, successive governments in Pakistan have avoided levying such a tax.

A number of pretexts are advanced in support of the age-old tax exemption granted to all kinds of agricultural income under the Income Tax Ordinance, which is administered by the Federal Board of Revenue. Their most fallacious stance is that it is the exclusive prerogative of provincial governments to tax agricultural income in view of entry number 47 of Part I of the Federal Legislative List contained in the Fourth Schedule to the Constitution, which relates to “taxes on income other than agricultural income”. They claim that the federal government cannot levy taxes on agricultural income and provincial governments have already introduced fixed land taxes through their respective laws, which are a substitute for the direct income tax on personal incomes of agriculturists.

The fact is that the Constitution itself relies on the Federal Law on Income Tax, where Article 260(1) defines the expression “agricultural income” to mean agricultural income as defined for the purposes of the law relating to income tax, which is now called the Income Tax Ordinance 2001. It is under this law that agricultural income has been exempted from income tax under section 41. The expression “agricultural income” has been defined in sub-section (2) to include not only income derived from cultivation and production of various crops, but also rents and revenues derived from lands used for agricultural purposes and all incomes earned from activities like sericulture and horticulture, including production of fruits, flowers, shrubs, vegetables and livestock.

Article 162 of the Constitution permits amendment to the expression “agricultural income” as defined for the purposes of the enactment relating to income tax, but requires the sanction of the president before such an amendment is moved in the National Assembly. Therefore, the definition of the term “agricultural income” given in section 41(2) of the Income Tax Ordinance 2001 can be amended through the National Assembly.

All four provincial governments have resisted every move to levy direct tax on the personal incomes of agriculturists because of strong opposition from their MPAs and other powerful lobbies of the landed aristocracy. Their resistance can be met if, for the time being, incomes derived from cultivation and production of major crops like wheat, rice, cotton, sugarcane and tobacco are allowed to remain exempt from income tax under the Income Tax Ordinance 2001.

It has become imperative to seek the president’s sanction under Article 162 of the Constitution, and introduce an amendment in the National Assembly in order to restrict the scope of the tax exemption given to the agricultural income under the Income Tax Ordinance 2001.

Published in The Express Tribune, December 11^th, 2010.