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Introduction

Despite a consistent decline in the relative share contribution of


agriculture to Pakistan’s gross domestic product (GDP), the sector has
maintained its prominence in the Pakistani economy and continues to ensure
food security. Agriculture constitutes one-fifth of the national economy with
a nearly 60 percent share in exports and provides a means of living to 42.3
percent of the labor force. However, public policy with regard to the
agricultural sector has been disappointing. Despite contributing one-fifth of
Pakistan’s GDP, agriculture accounted for less than 1 percent of provincial
taxes and 0.09 percent of federal taxes in 2016 (see Table 1). The subsidies in
the agriculture sector outweighed the agriculture income tax by a factor of 24
in 2016 (Figure 1), reflecting persistent fiscal indiscipline in Pakistan. To
improve their fiscal position, provinces in Pakistan must introduce a fair and
equitable system of direct taxation in agriculture, especially for large
landowners.

Agricultural Taxation in Pakistan

In Pakistan, the tax performance of both the federal and provincial


governments has historically been unsatisfactory. The federal and provincial
governments’ increasing reliance on indirect and withholding taxes is an
indicator of the state’s failure to tax higher income groups and privileged
lobbies to generate revenue. The sub-national governments’ fiscal approach
is to substitute taxation with federal transfers, which remains the primary
determinant of insufficient provincial and local tax collection today. This has
resulted in perpetual deficits and low tax capacities and has consequently
increased reliance on debts and foreign aid for development programs in
Pakistan. Agricultural taxation in Pakistan is a clear example of the country’s
flawed taxation system.

Figure 1: Agriculture Tax and Subsidies in Pakistan ($ per hectare)

Source: Author’s computation from Federal and provincial


(Punjab, Sindh, KPK and Balochistan) budgets.

Table 1: Trend Analysis of Agriculture Taxation and Subsidies in


Pakistan
Source: Author’s computation from Federal and provincial
(Punjab, Sindh, KPK and Balochistan) budgets. The 2017 estimates are
budgeted figures.

Note: Average annual exchange rate used for Rupee to Dollar conversion.

During the colonial period, in order to provide an incentive to loyal landlords


of the British Raj, the colonial administration granted central taxation
exemptions for agricultural income under the Government of India Acts
of 1919 and 1935. Pakistan has continued with this legacy under all three of
its Constitutions (1956, 1962, and 1973). This exemption affords special
protection to the economic interests of privileged land-owning elites, which
has added to rural inequality in the agricultural sector. The Agriculture
Census of Pakistan 2010 reveals that only 1.1 percent of farms command a
total area of 21.6 percent, with each farm larger than 20 hectares. On the
other hand, 64.7 percent of farms account for only 19.2 percent of total
operational holdings, with each farm less than 2 hectares in size. These
numbers demonstrate the stark rural inequality in Pakistan.

Many view the agriculture sector as under-taxed and over-subsidized (see


Table 1 above), disproportionately benefitting large farm owners. This is
because subsidies are applied per unit consumption, so small farm owners
who consume less get less subsidy while large farm owners consumer more
units and gets a larger share of the pie. Furthermore, agricultural exemption
has resulted in tax evasion, as incomes from other sectors are falsely reported
as agriculture income to receive exemptions. This is as per an examination of
the archives and reports of the Taxation Commissions of 1959 and 1986 by
the author.

Issues and Prospects

Studies on agriculture income taxation in Pakistan


by USAID and IDEAS reveal optimal potential for resource mobilization
through the agriculture sector, yet there are many constraints to address.

First, not everyone deriving income from agriculture necessarily owns the
land. Therefore, credible records of landowner tenures, sharecroppers, and
tenants are required. Second, the absence of records on produce and farm
gate prices and costs of agriculture inputs are major constraints for
calculating taxable income and liability. Average crop yields at farms are
monitored by provincial agriculture departments under the Crop Reporting
Service (CRS) (Punjab, Sindh, Khyber Pakhtunkhwa and Balochistan) but
data on crop income, farm gate prices and costs of inputs is not available. The
Pakistan Bureau of Statistics (PBS) and provincial governments do not
administer farm gate prices; rather, wholesale, retail, and consumer prices of
crops and value added are recorded and publicized. In addition, there is no
inexpensive or practical way to verify the agricultural income of individuals;
almost nobody keeps records of farm revenue and expenses.

Policy Recommendations

Pakistan can address its flawed agricultural taxation system by implementing


a number of policies. A feasible starting point would be to gradually
increases taxes on the most privileged 1 percent of farmers, who own over 20
percent of farmlands in Pakistan. As a result, the government would improve
its budgetary position and acquire sufficient funds for social protection, input
subsidies, price support, and enhancement of irrigation facilities. If the
agriculture sector remains untaxed, the persistent strain of subsidies and low
revenue may widen the fiscal imbalance.

Provincial governments could use an alternative assessment mechanism of


farm-based income to estimate presumptive income. Farm income depends
on many factors, including location, fertility of land, crop mix, inputs and
technology used, market information, infrastructure, and access to capital.
The PBS must then administer the farm gate prices of crops and costs of
agriculture inputs during the periodical Pakistan Social and Living
Measurement Survey (PSLM). Provincial governments must consolidate and
computerize CRS records with provincial Boards of Revenues and obtain
individuals’ citizenship records from the National Database and
Registration Authority in order to identify a potential tax base. In the
second phase, this database should be consolidated with the Federal Board of
Revenue’s National Tax Number database so that other business incomes
and profits may not be illegally reported as agriculture income.

After development of the above mentioned administrative and institutional


framework, the agriculture income may be taxed based on the tax rates
applicable to business income under Income Tax Ordinance, 2001. This
will ensure equitable treatment for agriculture and non-agriculture incomes.

Reformation of the agricultural tax system in Pakistan will be a gradual


process. However, it is a necessary undertaking if Pakistan wishes to improve
the fiscal position of its provinces and strengthen its economy