THE debate about taxation of agricultural income is as old as 1860 when income tax was first introduced in the subcontinent. The Income Tax Act of 1922 covered agricultural income as well but its application was withheld because there was practically no difference in the amount of land revenue collected on farm income (in some cases higher) than the revenue accruing under income tax on such incomes.
But this debate has lately assumed unusual vehemence. The protagonists stress the need for agricultural income tax in view of ever increasing requirement of resources for managing the state and development of economy particularly when non-agricultural incomes are already over-taxed.
Another argument, perhaps more relevant, is the need for fairness in taxing incomes irrespective of their origin. Yet another relevant point is that a whole lot of tax evaders take shelter behind exemption on agricultural income while actually the income is black money, corruption money, income arising from real estate, evaded tax or tax collected but not deposited in the exchequer.
The campaign is led by urban commercial /industrial elite who believes, somewhat emotionally, that powerful “feudals” exercise invidious political influence to successfully resist taxation of agricultural income.
The demand for taxing agricultural income is persistent and not entirely without merit. But it is imperative that people know that taxing rural incomes is a serious matter. The advantages and disadvantages of such a tax and how and in what manner to collect it, must be carefully considered before a bill is passed into law.
Such a tax would mean a major change in agrarian economy, its life and culture. It is that sector of economy where almost 90 per cent of people live a subsistence life and on whose hard work, blood and sweat, the welfare of a majority of our people depends. Taxing it deserves a deep long thought from the country’s legislators.
Agriculture sector contributes about 25 per cent of our GDP and employs around 50 per cent of labour force, particularly the unskilled labour. It is country’s largest source of foreign exchange earnings. It provides raw material needs of Pakistan’s major industries like textile and sugar. Agriculture is virtually the lifeblood of the economy. It has sustained its vigour despite neglect, vagaries of climate and massive transfer of resources to other sectors of economy since 1947.
Taxation of agricultural income has been a subject of official investigation and review for the past 60 years. From Darling Committee of 1937 to Shah Mahmood Qureshi’s Task Force of 1993 as many as 12 commissions /committees besides academic research have examined the taxing of agricultural income.
Most of the reports opposed income tax on agriculture excepting two, which too recommended a careful approach. The Taxation Enquiry Committee, 1959 recommended that the principle of taxation should be universal irrespective of source of income. Similarly 1964 Commission on Taxation and Taxation Tariff recommended tax on agricultural income. But for cogent reasons tax on rural income was actually not seriously considered until 1977 when under political pressure, the PPP government proposed and the National Assembly approved legislation to tax rural income.
The Finance Act of 1977 repealed the 1922 Income Tax Act, which had excluded agricultural income from taxation. However, law granted liberal concessions to the assessee. It exempted owners of 25 acres of irrigated land and 50 acres of non-irrigated land and later gave option to assess to pay tax on the basis of produce index unit (PIU).
But determination and evaluation of PIU’s presented serious problems and the martial law government decided to abandon the scheme in 1979 Finance Act and reverted to the old land revenue system with very substantially increased rates.
Why did successive governments not introduce tax on agrarian income up-till now? The reason was not that some-how the so-called “feudal lords” prevented its imposition. The influence of “feduals” a handful of rural rich, is actually a political myth. They are a demoralized community who is politically weak and morally hollow. They cannot defend themselves even when justice is on their side.
How could they come to the rescue of a rural economy, which they have practically abandoned and long forgotten, by mostly living in cities? No credit, if any, to the “feudal lords” for any good turn done to rural society. The reason for not taxing agriculture income was that this sector happened to be not only the poorest in per capita income terms but also bore the heaviest burden of indirect taxation (42 per cent). The balance of “economic wisdom” was to leave it alone as it could not bear the burden of extra taxation.
Agriculture sector has been in bad shape. Since 1947 successive governments adopted agricultural price and trade policies, which were highly favourable to manufacturing and services sectors. This resulted in substantial transfer of resources from agriculture sector.
These transfers had a significantly adverse impact on agricultural growth and led to gross inequalities of income against the rural population where per capita income is less than half of their urban compatriots even today. The planners continued to follow discriminatory price policies against agriculture until quite recently. Its share in GDP has declined from 55 in 1948 to 24.8 per cent in 1995-96.
While 70 per cent of rural population depends on 25 per cent of GDP, the urban population enjoys 73 per cent (manufacturing and services sector) of the GDP. Prices of agricultural inputs like fertilizer, seeds, power, pesticides etc. have been rising (hence cost of production) while prices of agricultural produce are controlled to favour largely the urban consumer and industrial user.
Obviously, farmers have had to sell produce at below the cost; consequently, their fortunes have been on the decline and no wonder they are emigrating in ever-larger numbers to crowded and choking urban slums for employment and “greener pastures”.
The share of agriculture sector in the allocation of federal resources for development has always been low and continues to decline. The benefit of government schemes and expenditure on water supply, education, health, electricity, roads, sanitation etc. are far larger for urban areas than the rural where much of the population lives. The fiscal policies lead to siphoning away to other sectors the savings and resources of agriculture, even the banking and institutional credit favoured, disproportionately, the manufacturing sector through PICIC, NIT, ICP , modarbas, stock exchanges, leasing companies and commercial banks. For the agriculture sector ADBP was the only credit agency.
This is only a glimpse of how our fiscal and economic policies have been detrimental to agricultural economy. Now if taxation policies on agriculture were also framed without taking into consideration the consequences or in anger, or to meet demand of industrialists close to the urbanite managers of state, it will doom our entire economy.
Undue burden on agricultural incomes, would crowd out private savings in agriculture, which go towards investment in improvement of land and water, land expanding and labour employing techniques. This will in turn reduce absorption of expanding pool of unskilled labour force, which non-agricultural sectors cannot employ.
The economic situation that we face demands contribution from all sections of the community notwithstanding the peculiar circumstances of rural society. So, farmers must pay tax on their income. It is important that while framing a tax system for agrarian income, we keep in mind that the farmers seldom keep account of their income and expenditure. They are not literate.
Agriculture is a way of life for the farmer and not merely an economic activity. It involves the life and labour of his entire family; wife, children and grand children including. Each one is contributing to the productivity. The agricultural tax has, therefore, to be “farmer friendly”, simple and equitable. As otherwise his energies will be diverted worrying about his tax problems. That will ruin him and the rest of us with him.
Before taking a decision the government must assess how much revenue would accrue to the exchequer from agrarian income tax and whether the “feudals” in rural areas, the target of this levy, will be brought into the tax net or they too would, like the urban “lords”, escape the tax liability. Forget about the fanciful statements of “politician economists” that tax on agriculture income would yield Rs40 billion or so.
A rough estimate of accrual of agriculture income tax prepared by a World Bank official, under most generous assumptions, suggest that it would yield about Rs4 or 5 billion or two to three per cent of total current tax revenue which after adjusting cost of collection would almost neutralize the merits of such a tax action.
The policy makers must also consider the social and economic value of this size of tax collection when large enough potential for revenue exists from the current schedule and by reduction in government and through good governance.
THE debate about taxation of agricultural income is as old as 1860 when income tax was first introduced in the subcontinent. The Income Tax Act of 1922 covered agricultural income as well but its application was withheld because there was practically no difference in the amount of land revenue collected on farm income (in some cases higher) than the revenue accruing under income tax on such incomes.
