Agricultural Taxation In PAKISTAN…

Why agriculture tax could not be implemented in Pakistan yet….!

Nimra Waseem

Qamar Abbas

Ali Iftikhar

Ramzan Razaq

Shahab Ashfaq

Introduction • The agriculture sector is the ministry of Pakistan's economy. It accounts for around a

quarter of the gross domestic product and provides employment to 45% of the population.

• Further more, it has provided much more momentum to economic growth and is expected to continue.

• Because the rural income is growing, so the demand of taxing the agricultural income has gained the new importance.

• Between 2001 to 2008 around 329 billion were transferred to rural areas due to high price of major crops, how ever, in 2010 to 2011 alone 342 billion were transferred. Now this rate has decreased.

• While the agricultural sector contributes to around quarter of the GDP, its contribution to tax revenue is at 1 percent constant.

• Any move to impose agricultural income tax is

how ever, mostly opposed by Political parties,

Public representatives with agricultural

background and organizations such as farmers

associates Pakistan (FAP)

• The issue has been on table for the last decade

during the time the tax to GDP ratio has varied between 9 to 11%. Presently it is 8.9%.

History and legal frame work

Agricultural income is defined in the 1973 constitution (Article 260 (1)) as follows:

• “agricultural income” means agricultural income as defined for the purpose of the law relating to income tax.

In the Income Tax Ordinance 2001,

• Any rent or revenue derived by a person from land which is situated in Pakistan and is used for agricultural purposes

Since 1996 all four provinces have instituted some form of tax on agriculture land or incomes. In its implementation this tax is largely a land tax rather than a tax on

agricultural income.

Some Basic reasons for why agricultural income cannot be taxed in Pakistan…!

It is very easy to say that like other sectors, income from agriculture should also be taxed but firstly it is already taxed and secondly its assessment and collection is very difficult and

impracticable because of many reasons e.g.

(a) It’s not possible to calculate agriculture income and tax on the income as compared with other sectors.

(b) The performance of Income Tax department is already unsatisfactory in already taxed sectors where they collect around 63% of the tax collected as advance tax.

(c) It would not be possible to calculate the agri income under the present system of tax assessment system.

(d) Income from agriculture is already taxed and collected by provinces in two modes as under

1. Payment of Tax on the basis of ownership of Land.(fixed)

2. Payment of Tax on the basis of income from agriculture.source

Agriculture Income Tax – “The Reality” by

(Dr. Mohammad Tariq Bucha) President Malik Khuda Bukhsh Bucha

Agriculture Foundation and Director & Chief Coordinator Farmers

Associates Pakistan (FAP)

Further from the same source

According to an Indian writer \ researcher, agriculture

tax in under developed countries is very difficult

because most of the transactions of income &

expenses are without receipts.

On the other hand, agriculture tax has very nominal

importance in developed countries rather it is almost

nil in developed countries

As is in under developed countries like Pakistan &

India where its contribution in GDP of the country is

24% & 15% respectively. A figure often discussed &

quoted in media and the economic policies

Land revenue rates under Punjab agricultural income tax act 1997

Land ownership tax

Up to 12.5 acre No tax

12.5 to 25 acre Rs 100/ acre

16 to 50 acre Rs 250/ acre

50 acre or more Rs 300/acre

For the next fiscal year, the government set the target of Rs2.01 billion for the agriculture income tax

Amendments As per the major amendments introduced to this Act in 2001, holders of 25 acres of irrigated

land (equivalent to 50 acres of un-irrigated land) were required to

submit their AIT return

• Despite an announcement last year, the income-mode of the tax was, however, not practically implemented due to capacity related issues of the collectors in the field

• The collection from this tax has been declining in recent times, according to the new budget document.

Failure of provincial tax collection system

• Sarfraz Khan, former member Federal Board of Revenue (FBR) and central leader of Kissan Board Pakistan, said the department concerned has badly failed in engaging farming community on this vital issue. The farmers were not taken into confidence at the time of the formulation of the new mechanism of agricultural income tax collection.

• Khan said that provincial machinery was also not capable to audit and assess taxable areas of the agriculture sector. The biggest issue is capacity as well as will of the people concerned, he observed

Source

http://www.thenews.com.pk/Todays-News-3-256010-Punjab-misses-agriculture-income-tax-target

Provincial agriculture tax in million Pk rupee

2011 to 2012

Punjab 670

Sindh 189

Khyber pakhtun khwa 20

Baluchistan 1

total 880

Total provincial revenues 0.13

Total tax revenue 0.08

Agriculture Land Ownership in Pakistan(As per Agriculture Statistics 2000)

source Agriculture Income Tax – “The Reality” by

(Dr. Mohammad Tariq Bucha) President Malik Khuda Bukhsh Bucha Agriculture Foundation and Director & Chief Coordinator Farmers Associates Pakistan (FAP)

Land Ownership Less than 5 acre

(%)

5 to 25 acres (%) 25 to 50 acres (%) 50 acres and plus

(%)

Pakistan 61.00 33.00 4.00 2.00

Punjab 61.34 34.00 3.40 1.40

Sindh 42.50 46.00 7.70 4.10

KP 79.00 18.00 1.70 1.16

Balochistan 30.00 52.00 10.70 8.00

AGRICULTURE INCOME TAX , THE DEBATE

ARGUMENTS IN FAVOR OF AGRI INCOME TAX

FIRSTLY

• The present economic situation of Pakistan requires for the government to raise the revenues in order to lift the tax to GDP ratio and in order t meet the revenue and fiscal targets.

• In order to improve the low growth rate and high

inflation funds should be raised.

SECONDLY

• There has been a structural shift of incomes towards

untaxed sectors which requires the broadening of the

tax base. Because rural incomes have been rising, a

window is now open to tax farm incomes to fund

Development

Further

ThirdlyAgricultural tax can be made progressive. I-e, those who earn more pay more. This is tied to the fact that many rich land lords do not significantly contribute to the tax revenue.

Fourthly

Agriculture should not be given special treatment as the exemption from income tax for this sector is not supportable on the grounds of equity.

Further more

FIFTHLYDiscrimination against the agricultural sector through the imposition of low prices has diminished in the past decade and now the sector has untaxed potential because of the decline of the implicit taxation.

SIXTHLY• Cultivation intensity has been growing

inversely with the farm size in Pakistan.

• As the farm side increases the efficiency with which it is cultivated decreases

• There fore the higher tax rate on larger farms will give more output from landlords.

ARGUMENT AGANST AGRICULTURE TAX

These include

• Agricultural income is already taxed by provincial agricultural income tax ordinance

• Rich landlords are not in majority and there for the revenue potential from the sector is not as high as claimed.

• The agriculture income tax will only burden

the poor farmers and in return effect the

performance of the entire sector

Further

• The percentage of larger land holdings has decreased due to inheritance law, conversion of agricultural land into residential colonies between 1970 to 1990

• Collecting direct taxes on agricultural income is a complex tax that is too difficult for the developing countries to administer.

• In addition to current direct taxation the agriculture is also paying indirect and implicit taxes.

Land

ownership

Less than 5

acres

5 to 12.5

acres

12.5 to 25

acres

25 to 50

acres

50 acres and

over

90.73 7.4 1.2 0.28 0.05

Who Bears the Burden of Taxes!

The case for treating farm incomes as business incomes for tax purposes is made on the ground that the differential treatment of agricultural incomes violates the principle of horizontal equity – equal incomes should be treated equally, and on the ground that by excluding agricultural incomes from taxation, a very large segment of the earning households are excluded from the application of the principle of vertical equity

Options for Agricultural Taxation

Taxation of agriculture incomes can takes place in a number of ways

• One of the earliest papers on agricultural taxation in Pakistan is by Hamid (1970) as,

Taxation Based on Land Area

• land taxes have a particular appeal because of their simplicity and presumed efficiency. Land taxes can be levied either with or without reference to the

Annual Rental Value and Site Value Taxes

• Taxes on pure rental income and site value are efficient taxes because they only take away some, and in the extreme case all, of the landowners’ rental income without affecting the supply of land or the level of output

• The capitalized value of the rental value of land is the site value of land.

Presumptive Income Taxes

• For the near future the tax will be some form of presumptive income tax that focuses only on crop

• A presumptive income tax would involve

estimating Gross Value of Output (GVO), subtracting

an estimate of cost of production (COP) and then

applying a tax according to a tax schedule that is

applicable to businesses in other sectors of the

economy.

Value Added Tax

• A comprehensive value added tax (VAT) can be designed in a way that the tax is effectively a tax on all consumption , irrespective of the source of income.

Taxing Agricultural Output and Inputs

• Distortionary taxation of outputs and inputs may also be desirable because of administrative difficulties in implementing efficient taxes such as land-based taxes.

• The efficiency of land taxes may not hold in the presence of imperfect insurance markets so output taxes or a combination of output and land taxes may be preferred to pure land taxes

FORMING THE IDEAL TAX POLICY

IT IS CLEAR THAT CURRENT TAXATION POLICY REQUIRES REFORMATION

In order to resolve the conflicting claims about the potential of the agriculture sector an expert panel consisting of economist specialization in taxation must be consulted in order to gain an accurate depiction.

Conclusion

The major conclusion drawn is that the current system of taxing the agricultural income is an inefficient and inequitable setup and that some frame of reforms in tax policy is necessary

Basically the tax could not be implemented because of its implemental structure is not much easy to apply in developing countries

Rich land lords always oppose any such bill or suggestion and the poor farmers are unable to pay the tax as they own little.

SourcesIncome Taxation Estimation of the Revenue

Potential in Punjab Anjum Nasim 10/14/2012

www.pildat.org Taxing the agricultural income in

November 2011

Agriculture Income Tax – “The Reality” by

(Dr. Mohammad Tariq Bucha) President Malik

Khuda Bukhsh Bucha Agriculture Foundation and

Director & Chief Coordinator Farmers Associates

Pakistan (FAP)

http://www.thenews.com.pk/Todays-News-3-

256010-Punjab-misses-agriculture-income-tax-

target

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