Its nice to see somebody from the government finally speaking up on the failure in taxing farm income so far. Media reports suggest that the federal government, led by finance minister Hafeez Shaikh, has been urging the provinces to tax agricultural income, real estate, and wealth, in order to ensure their respective fiscal balance.
The move comes months after the RGST met a stalemate, amid rising concerns over Pakistans failure to tax its elite, a bulk of which is constituted by the agricultural landlords. Shaikhs suasion might also be linked to US Secretary of State Hillary Clintons earlier remarks that Pakistan must tax its rich if it wants to continue receiving American financial assistance.
There is an imminent need to increase the tax-to-GDP ratio. However, making the farming businesses pay might not result in higher taxes, overnight. Earlier studies reveal that the taxation of the farming sector would have generated "Rs4-5 billion at the most", according to former SBP governor Ishrat Husain.
Today, in the wake of rising farming income levels, that number might be around Rs10-15 billion, which is only about 1 percent of the budgeted tax revenue for FY11 or a little above 2 percent of the direct taxes budgeted for this year.
The idea, however, is to bring the rural economy into the documented sector, and hence increase in tax revenues over time by virtue of the benefits of bringing the ancillary businesses into the tax net.
The revenue so collected from these areas should then be spent on the same people from whom it is collected, where top spending avenues should include health, education (including vocational skills), and other infrastructure, preferably routed through the system of local government.
It is pertinent to note that the law related to farming tax exists; for example "there is 15 percent of tax on agri income if you own or lease more than 50 acres of land," according to Jehangir Tareen. However, the flat tax is not the full and final liability, its a presumptive tax and if the income is more, then additional taxes have to be paid
The real problem, however, is that nobody pays taxes, neither in Punjab, nor in Sindh. "There is no political will of provincial governments to collect it," said Tareen adding that the arthi or the middleman also pays zero tax.
Achieving this political will is a daunting task, and any debate on this subject can move towards morality, which is not the main point of discussion here.
But here is something that can be done: since the IMF conditions are prepared in consultation with independent domestic economists, perhaps an advice can be given to the IMF to make agri tax a condition for any further tranche. Then again, when the politicians couldn roll out RGST, how could one expect that they tax their own bread and butter?
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