AGRICULTURAL incomes continue to be lightly taxed for a variety of reasons mainly due to reluctance of the provincial governments to tax farm earnings effectively, option available to farmers to either pay income tax or land revenue and the difference in tax exemption limit for farm and non-farm incomes.

Weak provincial tax administration in rural areas is also responsible for low revenue.

But the provincial governments are unwilling to review the tax rules and do away with the tax anomalies to improve their revenues from agricultural incomes.

Earlier this month, the business community in Karachi deplored the provincial government’s policy of continuing to tax agriculture incomes lightly while salaried individuals, private firms and businessmen are subjected to a myriad of federal taxes.

In a statement on April 6, the Karachi Chamber of Commerce and Industry (KCCI) said this amounted to promoting inequality and injustice, while creating a distinct disequilibrium in the tax system. The chamber wants the agriculture income to be taxed effectively and treated like other sectors of the economy.

Although agriculture contributes around 21pc to GDP, its share in the overall revenue collection remains less than 1pc

Although this sector contributes around 21pc to GDP, its share in the overall revenue collection remains less than 1pc. The KCCI asked the provincial government to realise the sensitivity of this anomaly and update the existing agriculture tax laws.

The issue of agricultural income tax (AIT) surfaces in the media and parliament from time to time particularly when the urban taxpayers experience the travails of being taxed indiscriminately and beyond their means.

The Sindh Assembly was informed last month that not a single landowner paid agriculture income tax (AIT) in Sukkur district during 2012-13, although there were 157 such individuals in the district falling in the tax net. Similarly, in Ghotki district only four out of 141 paid the tax. Across the province, out of 7,366 rich farmers only 1,343 (roughly 18pc) paid the AIT during the year.

Replying to a question why the landowners do not pay the agriculture income tax, Sindh Senior Minister for Education and Literacy Nisar Khuhro told the house that they thought they were being discriminated against.

Citing an example, he said that businessmen and salaried people, were exempted from paying the income tax if their income did not exceed Rs400,000 whereas exemption for landowners was up to Rs80,000 only.

So if a landowner’s income was Rs400,000, he would be paying Rs22,000 as tax. The minister favoured review of the tax laws to address farmers’ concerns.

Nisar Khuhro’s statement in Sindh Assembly acknowledges that agriculture income tax law exists. But the KCCI statement assumes that the landowners have been exempted from paying tax on agriculture income.

Since 1996-97 all the four provinces have levied tax on agriculture land or farm incomes with the option for the farmers to pay either one of them. Farmers have preferred to pay largely a land tax (based on acreage) rather than a tax on agricultural income. Punjab amended the Agricultural Income Tax Act 1997 in 2011 that stipulated that the tax would be land-based or income-based depending on whichever is higher.

But it remained effectively a land tax and this is one reason the collection falls much short of its potential. In case of AIT, its assessment and collection is very difficult because most of the transactions of incomes and expenses are without receipts.

Speaking before the Senate Standing Committee on Finance on June 9, 2014, Finance Minister Ishaq Dar said it would be a violation of the 1973 Constitution if tax on agriculture income was collected through the finance bill because after the 18th amendment agriculture is a provincial subject.

But provinces, he regretted, were not willing to authorise the federal government to impose tax on agriculture income, giving an impression that the centre could do this difficult task more efficiently which the provinces are unable to do and, hence, boost the revenue considerably.

Critics say the level of efficiency of the federal tax authorities has been exposed by much improved tax collection on services when when the subject was transferred to Sindh and Punjab.

On the independence eve, the Income Tax Act 1922 was the relevant law. The definition of ‘agricultural income’ as given in this law was changed in 1977 by the government of Z.A. Bhutto as part of his effort to remove exemption given to agricultural incomes and entrusted the federation with powers to collect AIT on hehalf of the provinces.

But this attempt was foiled by General Zia ul Haq who came into power in July 1977 through a military coup. He restored the exemption.

Published in Dawn, Business & Finance weekly, April 18th, 2016