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A radical shift in Sindh’s AIT policy

Updated June 04, 2018


THE Sindh Cabinet took an important decision on May 21 to exempt farm holdings below 50 acres or an annual income of less than Rs1.2 million from agriculture income tax (AIT).

Currently, holdings of 16 acres of cultivated and irrigated land and 32 acres of unirrigated land or more are subject to either land tax or AIT on incomes of Rs100,000 and above.

The decision follows complaints by farmers that the AIT exemption limit was much lower when compared to a similar ceiling applicable to urban incomes. The new exempted limit is exactly at Rs1.2m as proposed in the federal economic package announced on the eve of the fiscal year 2018-19 budget.

The rural population in Sindh has been neglected as agriculture was not put at the centre of development strategy, a move that would have encouraged big farmers to contribute to the province’s progress by paying AIT honestly

The move thus harmonises the federal tax structure and Sindh’s tax structure and builds equity in the national income tax system. Income tax might discourage further fragmentation of agricultural lands which is triggered by escalating slabs linked tothe size of the holdings.

The combined collection of land tax and AIT of an estimated Rs1.3 billion compared poorly against the total provincial direct taxes of Rs10.4bn recorded in fiscal year 2016-17. For fiscal year 2017-18 an aggregate amount of Rs1,650bn was budgeted against total direct taxes of Rs12.875bn. The provincial government hopes to meet the target.

Around 90pc of the direct taxes are collected from Karachi. These include property tax, taxes on professionals and trade, and capital valuetax. Going by the usually quoted data in the absence of official figures, in fiscal year 2016 Karachi contributed $64bn (in nominal dollars) to Sindh’s provincial gross product of $83bn.

A year later, when measured in purchasing power parity of the rupee and expressed in greenback Karachi’s gross domestic product jumped up to $212bn and the provincial gross product went upto $291bn.

That indicates how the rural people in the province have been left behind in the race for economic and social development because agriculture was not put at the centre of federal or provincial development strategy which would have encouraged big farmers to contribute to the province’s progress by paying AIT honestly.

Hopefully, the Sindh cabinet’s decision will help improve farm productivity. It is the small- and medium-sized peasants who cannot fully benefit from government subsidies on farm inputs and support prices on wheat or sugarcane. Theyhave very limited access to the otherwise fast picking up farm credit.

Smaller farmers cannot afford to buy enough farm inputs to increase productivity and their savings are not enough to buy implements to modernise their farms. They are the worst victims of domestic and international price shocks.

Perhaps tax cut and rationalisation are a better choiceto improve the growers’ earnings, savings and investment. Sindh’s own experience also shows that by reducing or rationalising the incidence of taxes such assales tax, revenues have gone up.

As agriculture is the backbone of the economy, the sector’s uplift should be both a provincial and national priority. This has also found expression in Pakistan Tehreek-i-Insaf’s 100 days agenda if the party is voted into power in the general elections.

PTI’s advisor Jahangir Tareen says PTI would impose an “agriculture emergency” to uplift farming and conserve water ona “war-footing.”

The party has pledged to increase farmers’ profitability, improve growers’ access to finance, transform commodity markets, incentivise value-addition, revamp the livestock sector and upgrade and implementthe National Water Policy.

Tareen has distinguished himself as a corporate farmer, with collective family ownership, in an environment where the pattern of farm ownership is an impediment in the development of the market economy.

What he has done on ata micro-level has to be replicated widely in the countryside by bringing small land holdings into corporate or cooperative farming needed to produce crops on economies of scale.

However,some economists have a different view. In an article published in The News on May 24, noted economists Dr Akmal Hussain and Dr Khalid Malik stressed the need to “shift away from the elite farmer growth strategy of the last six decades to agricultural growth led by farmers with small-to-medium-sized holdings (less than 25 acres).”

And such farmers shouldbe allotted the available three million acres of state landto achieve higher agricultural growth and exports and build equity. They maintain that small-and medium-sized holdings have a much higher potential for an increase in yield than big holdings.

Whatever the strategic approach to agriculture development, Sindhi’s new AIT policy, if successful, can be emulated by other provinces with adjustments in land holdings and income exemptions depending on the fertility of their soil.

Published in Dawn, The Business and Finance Weekly, June 4th, 2018