Agricultural Income Tax-Time to Impose

By | on June 5, 2015 | 0 Comment

taxOn May 29th 2013, I wrote a piece in The News, one of the leading English newspapers of Pakistan (Get Agrarian ) about the need for carrying out comprehensive agrarian reforms as opposed to limited distributive land reforms, advocated by some advocacy groups to transform the political economy of Pakistan’s agriculture. While emphasizing the need to have clarity of mind about the above mentioned two interrelated but distinct concepts, I mentioned about the need for the imposition of tax on the income derived from agriculture which is presently exempt from this fiscal measure. Some of the readers have questioned my suggestion on the plea that agriculture is already overtaxed and it will be a disincentive to levy any further tax on a sector which has a lot of potential to become the engine of growth. The looming threat of food security has been quoted another reason for not imposing the tax on agricultural income. This article is response to these observations and objections

Under the 1973 Constitution of Pakistan, it is the responsibility of the respective provinces to tax agricultural incomes which has been defined in Section 41 of the Income Tax Ordinance as “any rent or revenue from land … which is used for agricultural purposes”. Under the Ordinance even rental incomes derived from agriculture is exempt from taxation because the legislation defines agricultural income in a very broad manner.

It will be interesting to note that this exemption is available to the farmers in most of the countries, developed as well as developing, for a variety of reasons. Historically farmers in the developed countries had been enjoying this exemption from the modern income tax laws because they were subject to land tax. They have continued to be exempt as agriculture now contributes less than 5 percent to the gross domestic product (GDP) of these countries and now it is not cost effective to do so. In developing countries this sector has been kept untaxed because of the colonial hangover and the power and prestige enjoyed by the landed aristocracy in these countries. Now their biggest supporters are the newly emerging class of urban industrial landlords, who have purchased vast tracts of agricultural land to escape taxation

Usual arguments given by the pro-farmers advocacy groups for not imposing tax on agricultural incomes do not have solid grounds. One of their off the cuff arguments is the so-called over taxation of the agriculture sector. According to this argument, advanced by the opponents of agricultural income tax, agricultural sector of Pakistan is already overtaxed because bulk of Pakistan’s fiscal taxation is based on indirect taxation and 60 percent of Pakistan population by being rural dwellers is contributing large resources to the national exchequer in the form of this indirect taxation.

Related to the above are the so called terms of trade argument. According to the proponents of this line of reasoning, industrial sector charges exorbitant prices for the goods they sell to the farmers while the agricultural commodities, on the other hand, seldom fetch handsome prices for the farming community.

Frankly both the arguments, over taxation of the agrarian sector and adverse agricultural terms of trade, have lot of factual validity and historical truth but cannot be used as a logical argument for exempting the rich farmers from the imposition of tax on their income. Payment of tax is not a collective responsibility, rather it is the individual income earner who is assessed to be taxed or not on the basis of his annual income crossing the threshold, not the sector as a whole which determines the tax liability. Basic principles are the same for everyone; all those earning equal incomes should be treated equally irrespective of source of income. No one should be allowed to take refuge under the garb of over taxation of a community as a whole.

Farmers must lobby for rationalisation of prices of agricultural inputs, industrial products and public goods but should not give excuse to the rich landowners to escape taxation on this plea.over the last few years the agricultural terms of trade have improved a lot and the ruthless squeezing of the peasants with due process of law has been eliminated although farmers are still subject to vagaries of nature, governmental neglect, inadequate access to banking finance and other difficulties. In any case,the poor farmers will be exempt from agricultural income tax.

Interestingly, PML-N’s manifesto is silent about the agricultural taxation although the dominant urban industrialist lobby is very vocal advocate of this tax. There are several reasons for this calculated silence. Firstly, it is a constitutional issue. Agriculture being a provincial subject, reinforced after the 18th Amendment in the constitution, can be taxed only by the provinces and I have my doubts whether the federal government will be in a position to force the provinces to legislate on such a sensitive issue.

Secondly, it is a political issue. None of the provincial legislatures has the guts or the will to initiate any legislation regarding levying of income on their incomes.  Provincial governments haven’t been collecting agricultural income tax although legislation was promulgated at the provincial level way back in 2000/01 to tax agricultural incomes from this source due to lack of political will . It has become such an emotional issue for the farmers that even those who will not be affected at all by the imposition of tax on rich landlords vehemently oppose it.

Apart from absence of political commitment, it is lack of proper policy framework and inadequate wherewithal of the taxation institutions which are delaying the imposition of tax on agricultural incomes. How the tax will be imposed? As a capacity tax on land which is already there for centuries? As a tax on incomes of the farmers none of whom keep record of their income and expenditure? Even the military regime could not document the urban merchants but are expecting the farmers to keep the record! Who will collect the tax? The traditional land revenue authorities or the urban middle class income tax officers? All these questions have not been properly thrashed out either by the policy makers or by the advocacy groups demanding imposition of agricultural tax. Let me put up a draft plan of action which could be the starting point to  impose agricultural income tax without creating much difficulties for the farmers by observing the classical canons of taxation-equity, efficiency and growth .

  1. Amend the income tax ordinance and bring income derived from agriculture at par with income earned from any other legal source for imposition of tax on all, repeat all, incomes derived from any legal source. There are certain other sectors which also enjoy this immunity.
  2. For next ten years, provincial governments are advised to utilize the existing revenue structure as an institutional mechanism for the assessment and collection of agricultural income tax
  3. Every year, the district collector of the district would announce per acre rates of leasing of agricultural land for tax assessment basis on the same pattern as they do for the purpose of levying stamp duty on sale/purchase of land. For this purpose they can rely on the information of their revenue staff which is fairly accurate
  4. Based on this information, the district collector will assess the tax to be recovered from land owners after allowing the usual exemption. For example, if the land lease rates for a district in Punjab or Sindh are assessed to be Rs.25, 000 per acre per year, anyone owning ten acres or less of land will be not paying any tax at all because his income is below the threshold of taxable income. For convenience sake, we should not distinguish between a land under crops or under orchards.
  5. Only the owners of the land whose notional lease amount is above the taxable threshold will pay the tax. If he has given his land to tenants on fixed rates or on cost/income sharing basis, then he will decide the issue of sharing the tax burden with their tenants the way they do for other costs
  6. It will replace the land revenue/usher but will not affect the water rates which are basically user charges and not a tax on income

I understand most of farmers will be disturbed at the thought of paying tax on their agricultural incomes but they should read the writing on the wall and get ready for this eventuality. My advice to them is to think logically and act rationally. Ground realities have changed and time is not on their side.

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