FINANCE Adviser Shaukat Tarin’s remark that agriculture will be among the sectors whose incomes would be taxed as part of the new measures to boost revenue has provoked, as expected, a backlash from the country’s feudal lobby which dominates the legislatures.

Faced with a stiff resistance in both National and Punjab assemblies, as demonstrated by a rare unity among members of all the political parties opposing the move, he announced on Thursday that the government has no plans to tax agriculture and such a step, if taken, would come after 23 months of IMF programme.

The powerful landed gentry seemed determined not to let it happen even at the risk of scrapping of the IMF support programme.

The November 25 communique of the IMF executive board, however, briefly states that fiscal adjustment will be primarily achieved by phasing out energy subsidies and strengthening revenue mobilisation through tax policy and administrative measures. The thrust of the programme — and its conditionality — is primarily based on the targets and measures that Islamabad has itself set for the next two years.

Juan Carlos Di Tata, a senior IMF official, during a question-answer session, was specifically asked about agricultural tax. He did not give a categorical reply. He said that in the medium-term the Pakistan government wanted to increase the tax ratio significantly by three to four percentage points of GDP through the year 2012/13. And this would require a number of measures, including elimination of exemptions in the general sales tax, elimination of exemptions for the income tax, including possibly commercial agriculture, and also, at some point, introduction of a value added tax with a minimum number of exemptions.

During a visit to Washington in October to hold talks with the IMF officials, Tarin had promised to bring all sectors, including agriculture, under tax net, saying there would be no ‘sacred cows.’ It makes one recall how similar promises Pakistan had been making to the IMF in the past to seek loans whenever it was in serious financial trouble and then had been managing to wriggle out of its commitments.

The feudal lords often try to confuse the issues by equating themselves with small growers. So, their major argument in the parliament was that the rise in prices of diesel and other agricultural inputs has already made the life of growers miserable and the tax would make it more miserable. Hence they should not be taxed.

The fact is that the life of growers and peasants would always remain miserable as long as archaic mode feudal production survives. Second, if their income is to be exempted, why the salary of a low-tiered employee should be taxed for he also faces similar difficulties? Equity demands that all incomes should be taxed without any discrimination. Agriculture accounts for 21.6 per cent of the GDP and 43.4 per cent of the total workforce and is the main source of livelihood for 66 per cent of the country’s population living in rural areas.

In 2001, the government of Gen. Pervez Musharraf decided to levy tax on agricultural incomes and issued a directive to all the provincial governments to go ahead and introduce the tax from July 1. Although some exemptions were incorporated to favour certain sections of the farming community, a positive aspect was that a beginning was being made. It began with the land tax whose collection has remained stuck at a paltry sum of Rs1.5-2 billion. Then, towards the end of Musharraf’s rule, and general elections around, an unsuccessful move was made to federalise tax collection on farm income.

The hard fact is that the constitution exempts farmers from taxes on their incomes from agriculture and only provincial governments are allowed to levy a land tax. The federal government cannot directly impose taxes on farm incomes or land. The political power of large landowners has prevented Islamabad from seeking such a change in the constitution and also discouraging the provincial governments from using their authority to levy farm income taxes.

The only direct tax on agricultural producers, hence, happens to be land revenue or land tax. The federal government has, however, instituted a small wealth tax on agricultural land but collection from this tax are often about one-tenth of the land revenue.

Because of this peculiar situation, the agriculture sector has become a tax shelter for other forms of income. To avoid income taxes, some businesses transfer their incomes to agriculture and enjoy exemption on a large proportion of their taxable earnings.

The donor agencies have often brought this fact to the notice of Islamabad and pointed out that the exemption of agriculture sector from income tax laws has motivated industrialists to buy farm lands to hide their actual income. Owning big farms in the suburban areas in big cities is a matter of status as well as a source of weekend fun for corporate executives. But more than that, it provides a cover to all kinds of earnings when shown as agricultural income.

So, the farm sector has become a source of tax evasion instead of contributing revenue to the exchequer. By levying the same tax on agricultural incomes as being applied to other sectors, the government can earn substantial revenues over the medium term. And, by sparing agriculture, the government also puts a heavy tax burden on the rest of the economy.

The feudal lobby has always argued that the agriculture sector had been taxed quite heavily through indirect and implicit taxes in the past and substantial resources were transferred to other sectors. These policies distorted the allocation of resources. However, the measures taken in the 1990s have certainly weakened this argument. Major changes in the land revenue system were introduced in 1975. And now the government’s procurement prices for farm produce, specially wheat have been significantly raised.

The Finance Act of 1977 represented a breakthrough as it removed the exemption of agricultural incomes from taxation. But after the military coup, Gen Zia suspended the Finance Act and restored the tax exemption on agricultural incomes by promulgating an income tax ordinance in 1979 and reintroduced the land revenue with higher rates.

Under the Finance Act of 1977, the tax on farm incomes was to be collected by the federal government but the proceeds were to be deposited directly in the account of the province from where the revenue was raised.

As part of the ESAF and EFF negotiated with the IMF in September 1997, the then government had committed itself to a strategy to tax agricultural wealth and incomes. It was to be implemented in two stages – first, a uniform land-based tax for all the provinces and, second, to move from land-based tax to agricultural income tax in the medium-term. By terms of the agreement, an agricultural income tax was expected to be in place some time in the early 21st century.