PUNJAB’S law on taxing income from agriculture is but a hugely flawed legislation. It not only discriminates between small and big landowners, but also between businessmen and salaried persons.
Moreover, it differentiates between all taxpayers — smallholders, businessmen and salaried persons — and large farmers.
The federal tax law says tax on income from business exceeding Rs6m and income from salary exceeding Rs7m is subject to maximum rates of 35pc and 30pc respectively. On the other hand, the tax on agricultural income exceeding Rs0.3m is 15pc, with no ceiling on the income. This is contradictory.
At the time of the introduction of the Punjab Agriculture Income Tax (PAIT 1997), the exemption limit was fixed as Rs80,000, considering it as annual income from 50 acres of irrigated land or 100 acres of un-irrigated land. Meanwhile, the exemption limit for businessmen and salaried persons was fixed at Rs40,000 by virtue of the Federal Finance Act 1997.
An agriculturist having an annual income of more than Rs2.5m will pay less tax than a businessman or a salaried person earning the same amount of money
With the passage of time, the exemption limit on income from business and salary has risen 10 times to Rs400,000. Hence, the exemption limit for agricultural income also needs to be revised.
The PAIT 1997 says the cultivator/beneficiary of 50 acres of irrigated land or 100 acres of un-irrigated land or a person with annual agricultural income of at least Rs80,000 is required to file an annual agriculture income return.
Under the law, the tax-exempt agricultural income is one-fifth of the tax-exempt income from business and salary. This is even after the passage of 18 years, notwithstanding the latest amendments in the PAIT 1997 in July 2013. This makes agricultural income, equivalent to minimum annual wage of Rs156,000, taxable for Rs3,800.
The agricultural income is subject to tax from Rs80,000 onwards with a 5pc rise till 10pc at Rs300,000; the tax then flattens at 15pc for incomes above Rs300,000. Under federal law, the maximum tax-exemption limit is Rs400,000 for the business community and salaried persons, while the income tax on agricultural income computes to Rs25,500.
Against the lowest tax slab of 7pc on business incomes (applicable at over Rs400,000) and 2pc on salary incomes (over Rs400,000), the tax slab on agricultural income is at its maximum rate of 15pc. Meanwhile, the highest tax slab on business income (above Rs6m) is 35pc and that for salary income is 30pc (above Rs7m).
Therefore, the difference between the lowest and the highest tax slabs on business income is 28pc (35pc-7pc) and 28pc for salary income (30pc-2pc), whereas agricultural income above Rs300,000 is subject to the same tax rate of 15pc.
This significant disparity in tax rates for the business and salaried class on one hand and for agriculturalists on the other means that an agriculturist having an annual income of less than Rs2.5m pays more tax than a businessman or a salaried person earning the same amount. The lower the annual income, the higher the tax revenue from an agriculturist as opposed to a businessman and or a salaried person in the same income bracket.
But an agriculturist having an annual income of more than Rs2.5m will pay less tax than a businessman or a salaried person earning the same amount of money. The higher the annual income, the lower the tax revenue from an agriculturist in contrast with a businessman or a salaried person with the same income.
The higher that a landholder’s income is above Rs2.5m, the higher is the tax benefit enjoyed by him at the cost of businessmen and salaried persons in the same income group, and at the cost of small and middle class farmers subject to the same tax rate enjoyed by him.
The difference of 20pc between the highest tax rates of 35pc on business income and 15pc on agricultural income also paves the way for tax evasion by people earning from both these sources.
The treatment of agricultural income at par with business income in terms of tax-exempt income and the homogeneity of tax slabs can culminate in a smooth broadening of the agricultural tax base, with a substantial enhancement in tax revenue from its budgeted projection of Rs2bn for 2015-16.
Tax-exempt incomes from agriculture should be twice or at par with incomes of the business community and salaried people because at the time of the promulgation of the PAIT 1997, the tax-exempt income from agriculture (Rs80,000) was twice that of business/salary income (Rs40,000).
Agricultural income tax slabs should also be at par with the FFA 2015 so as to relieve the smallholders and lower middle-class farmers and transfer a proportionate burden of agriculture taxes to the higher income groups, putting an end to the opportunity for tax evasion by the big landholding elites with allied corporate businesses.
Consistency between federal and provincial laws is also a constitutional requirement. In the existing situation, the implication of the constitution’s Article 143 is intensified because the tax benefit enjoyed by an agriculturist in Punjab is not only at the cost of small farmers, businessmen and salaried people of Punjab, but also at the cost of the business and salaried class of the other three federating units.
The reason is that the tax on the business and the salaried class is a federal subject, whereas tax on agricultural income is levied by all the federating units. Ahsan Rehman, a small agriculturist from Sahiwal, told Dawn that “given the existing rates of agriculture income tax, the burden is always on the small- and medium-sized growers, and the benefits rest with the big farmers”.
Published in Dawn, Economic & Business, August 31st, 2015