RAISING farm income tax seems to be as problematic as increasing agricultural productivity in Sindh.

With agriculture’s share declining to a reckoned range of 15 to 16 per cent in the guesstimated gross provincial product (GPP), the revenue from farm income tax is stuck at less than half a billion rupees. The authorities have yet to firm up the real size of the GPP and its key components.

While there has been a notable improvement in collection of such taxes as sales tax on services and infrastructure development cess under guidelines set by the Sindh Tax Revenue Mobilisation Programme (STRMP), farm income tax continues to be a poor revenue-yielding drag.

The STRMP 2015-16 was designed to deepen and consolidate tax reforms to increase the provincial tax receipts from Rs91 billion to Rs200bn over three years.

In the fiscal year 2016-17, the total revenue collected by three provincial tax authorities shot up by Rs56bn to Rs147bn.

However, the inefficient mode of production and marketing, lack of modern logistics and depleted irrigation infrastructure hamper both the growth of the agricultural economy and tax revenues. Much of the farm economy remains in the informal sector, marked by rampant poverty and migration of labour from rural to urban areas.

No steps have been taken to encourage corporate or cooperative farming with small cultivators providing their equity in the shape of their current uneconomic landholdings.

The landed gentry, which benefits the most from the government’s agricultural incentive packages, is not convinced that it should pay its legitimate share of taxes to the provincial exchequer

That could provide the wherewithal for farming to be undertaken on economies of scale and boost productivity and possibly facilitate the provincial government to resume the suspended allotment of state lands to the landless peasants.

Under the current pattern of land ownership, the landed gentry, which benefits the most from the government’s agricultural incentive packages, is not convinced that it should pay its legitimate share of taxes to the provincial exchequer.

The province is paying the price for not carrying much-needed land reforms, with the market forces not strong enough to steer the course of development of the farm economy though they are slowly changing the rural landscape.

Though modernising, the management of the Board of Revenue (BoR), which collects farm income tax, is still struggling to shake off its historical legacy and adopt a cultural change to improve its efficiency.

The issue becomes more complicated with the option given to the farmers to pay income tax or land revenue. The revenue remains far below its potential, though some signs of improvement were witnessed last fiscal year.

According to the latest official figures, the agricultural income tax (AIT) has risen from Rs358m year-on-year to Rs466.5m in 2016-17. Land revenue has increased to Rs235.6m from Rs203.9m during the same period. But over the past five years, the annual average growth rate has been a mere 5.57pc in case of AIT and 3.53pc in case of land revenue.

In sharp contrast, the Board of Revenue collected Rs1.605bn from the transfer of property, Rs3.25bn as capital value tax and Rs8.04bn from stamp duties.

The BoR has successfully digitalised record of agricultural holdings with clear land titles, but its impact on AIT revenues does not appear to be any significant so far despite weakening sway of the traditional patwari system which was manipulated in favour of big landlords.

The annual AIT targets set by the Sindh government have never been met. The authorities are now mulling new approaches to secure better results with the AIT target set at an ambitious Rs1bn for the current fiscal year.

With the collaboration of the World Bank, the reforms unit of the provincial finance department has undertaken a study for possible policy changes in AIT to improve revenue. Tax buoyancy is linked with the level of development of the rural economy as it is with the tax policy and efficiency of tax administration.

The surge in revenue from sales tax on services, as in case of Sindh, also indicates that tax compliance is linked to a fair and reasonable, rationalised tax rate. Every year without fail, the provincial government has been reducing standard sales tax rates and/or rates for different categories of taxpayers to encourage voluntary tax compliance.

In the budget 2017-18, the sales tax rate was slashed from 13pc to 3pc on services provided by specific class of indenters and call centres, from 10pc to 8pc on travel agents and tour operators, and from 8pc to 3pc on renting services of immovable property.

Sindh’s experience also clearly demonstrates that devolution rather than centralisation of taxes —which fall within the sub-national jurisdiction — can be much better collected from the documented activities of well-developed urban institutions while rural areas dominated by the informal sector are difficult to access for widening the tax net.

This is reflected from the declining share of the BoR in provincial tax revenues when compared to two other peer provincial organisations. Their respective shares in the overall provincial tax receipts along with actual collection figures for fiscal year 2016-17 are as follows: BoR 9.81pc (Rs14.48bn), Excise and Taxation Department (E&TD) 36.56pc (Rs53.67bn) and Sindh Revenue Board (SRB) 53.57pc (Rs78.637bn).

Looking at the past five-year performance, the revenues collected by SRB grew by an average 23.63pc, E&TD by 19.43pc and BoR by 5.58pc.

Among the comparative better revenue-yielding taxes collected last year by E&TD, the fastest growing was Sindh Infrastructure Development Cess, at Rs41.39bn, followed by motor vehicles tax at Rs6.17bn, property tax Rs1.89bn and provincial excise at Rs3.49bn.

Infrastructure cess increased by an average of 22.73pc over the past five years, followed by motor vehicle tax at 16.7pc and property tax at 6.3pc.

Given the provincial experience, Sindh Chief Minister Murad Ali Shah is convinced that the devolution of taxes to the right level helps to improve tax revenue.

In his budget speech for the current fiscal year, he expressed dissatisfaction with the “dismally low” collection from property tax, and said his government was considering devolving the tax which would also “increase the resources of the local councils”.

Ultimately, it is equity in tax policies and efficiency in a devolved tax administration system that can deliver a robust tax culture. But the level of tax buoyancy — particularly of AIT — is linked to the modernisation of farm economy.

Published in Dawn, The Business and Finance Weekly, October 23rd, 2017