By virtue of agriculture being a provincial subject, each province has in place a presumptive regime for the collection of income taxes from this sector. Going by the dictionary of Provincial laws, agricultural income consists of rents received from property used for agricultural purposes and income derived from cultivation or from owner-occupied buildings on the property.
However, the quantum of revenue generated through these taxes has so far been paltry. Official data show that in FY06, total revenue collected under this head by Punjab made up only 2.1 percent of the total revenue generated by the provincial government and the contribution of agricultural income tax in other provinces is equally dismal.
Lack of oversight and unjustifiable exemptions are among the biggest reasons behind the insignificant contributions to revenue from the agriculture sector, despite its significant contribution to the economy.
According to the Agriculture Census 2000, 85 percent of the total cultivable land in Punjab is exempt from agricultural income tax (AIT) because landholdings of up to 12.5 acres are considered to be ‘subsistence level’ and are thus exempt from AIT. Similarly, in Sindh, AIT is charged at different rates depending on the area under cultivation.
While proponents of the status quo have long-argued in favour of maintaining the current slabs, tax experts, including government officials, contend that minimum limits for taxable acreage are extremely high.
Renowned tax expert Shabbar Zaidi highlighted that, “The study being quoted as justification for maintaining the minimum taxable landholding at 12.5 acres was conducted in 2001,” asserting that since then the income of agriculturists has surged on the back of rising crop yields and commodity prices.
Market sources reveal that at present, the average annual rate of rent on agricultural land in Punjab is more than Rs50,000 per acre. In other words, if the rental income from farm land is Rs50,000 per acre, any individual who has rented out six acres of agricultural land receives Rs300,000 per annum. Yet, by virtue of the 12.5 acre-floor rule, this income is barred from being taxed since the land holding falls in the ‘subsistence level’.
Following the doctrine of equitable taxation, if income of more than Rs300,000 earned in other documented sectors is taxable, then the same criteria should apply to agricultural income.
In an earlier interview with BR research, Jehangir Khan Tareen had highlighted that even though an agricultural income tax collection mechanism is in place, it is not enforced because of a “lack of political will”. Elaborating on his response, Tareen said that as long as influential landlords and politicians do not pay taxes, others cannot be compelled to meet their obligations either.
To put this statement into perspective, consider the ultimatum issued to the Sindh government by the Sindh Cotton Association during a press conference in Hyderabad last week. Representatives of cotton growers warned legislators that if agriculturists or middlemen working with them are subjected to taxation, they would withdraw support for the local politicians in the next elections.
Incidentally, none of the participants mentioned the economic viability of their businesses or the reasoning for their inability to pay taxes.
Viewed in the context of crop yield and prices, it may be noted that the current price of raw cotton or phutti in Punjab is about Rs5900 per maund, while in Sindh, the same is priced about Rs5500 per maund. Similarly, the support price for wheat, as announced in budget FY11 is Rs 950 per 40kg. In fact, increases in the prices of wheat, cotton, rice and other crops have outpaced inflation in recent times, further bolstering incomes in the agriculture sector.
Mindful of the lack of political will, Finance Minister Hafeez Sheikh has stressed that tax reforms will take place, regardless of politicking. Yet actions speak louder than words and the government’s quick back-stepping on other tax reforms hints that any plans to increase the tax burden on the agriculture sector will remain on the back burner for now.
It is regrettable that just as blanket subsidies have continued on electricity and fuel prices on the pretext of guarding the financially vulnerable; unrealistic floors on agricultural income tax will also persist on the excuse of subsistence level earnings.