A substantial amount of Rs69 billion was being lost in agriculture income tax (AIT) every year, says the chief of the Income Tax Policy Reforms wing of the Federal Board of Revenue (FBR) Reema Masud, quoting a recent AIT gap study by the FBR.

She was addressing a seminar on “Economies of Tax Expenditure by FBR.” The debate on the issue was organised by Pakistan Institute of Development Eco­nomics amidst rising concerns about surging tax exemptions/reductions and tax credits hitting a record Rs1.149bn in 2020-21.

If the statutory slabs of tax rates are applied on the average income of growers for six tax categories of farm sizes, the FBR analysts say that revenue forgone works out to Rs69.5bn. AIT on landholdings up to 7.5 acres is supposed to be exempted.

The key assumption in the estimated tax gap is that average income per acre earned by a grower is Rs50,000 on the basis of the current average price level of the commodities.

Going by the above reckoning, the incomes of growers should go up with the current surge in food prices and the AIT gap would further widen with tax collection remaining stagnant.

According to Pakistan Bureau of Statistics data, food inflation jumped up by 15.1 per cent in urban areas and by 17.8pc in rural areas in July on a year-on-year basis. Food inflation accounted for 64pc in the overall inflation level for the month recorded at 9.3pc on a year-on-year basis.

The Income Tax Policy reforms wing of the FBR is concerned about the phenomenal increase in tax expenditure (cost of tax exemptions reductions/tax credits) from Rs540bn in 2017-18 to Rs1.15 trillion in 2019-20

An analyst is of the view that rural incomes are improving as indicated by the pickup in current demand for tractors, motor-cycles and farm inputs.

Despite global pandemic and lockdown, exports of fruits and vegetable grew by 12.5pc to $730 million in 2019-20 with 7.6pc drop in the quantity sold, yielding more lucrative returns.

It, however, needs to be conceded as the Asian Development Bank report shows that growers are losing earnings because of the rising cost of inputs and lingering bottlenecks in domestic movement and marketing of perishable items in some areas owing to lockdown.

But the farmers are being compensated for their losses. The government has released funds worth Rs6bn to growers as subsidy for pesticides under its agriculture fiscal package for 2020-21. The funds would be distributed by the provinces.

A Rs50bn relief package was announced on May 14 to soften the impact of Covid-19. That included Rs37bn subsidy on purchase of fertiliser, Rs2.5bn sales tax subsidy on locally manufactured light tractors for one year and Rs8.8bn reduction in markup on farm loans. Another Rs2.3bn has been earmarked for subsidy on cottonseeds.

Assuming that the AIT gap of Rs69bn is fully closed, the growers would be just repaying the four provincial exchequers only Rs19bn after the injection of the Rs50n subsidy.

In the tax year 2018, according to the FBR study, the total AIT collection by the four provinces was close to Rs1.6bn.

The PTI manifesto is silent on the need for AIT reforms and there is no official policy to bring all eligible incomes of big farmers into the tax net. AIT is a provincial subject.

However compelling factors have emerged which suggest that the lack of policy focus on boosting AIT revenues is becoming fiscally prohibitive and the opportunity to raise taxes in an expanding farm economy should not be missed.

To begin with, there is the unsustainable federal fiscal deficit and serious problem of cash flows in the provinces that surfaced in 2019-20.

Latest official reports show unsustainable fiscal deficit at 8.1pc of GDP for 2019-20, though lower than the previous year’s 8.9pc. It is nearly 1pc lower than the earlier estimate for last year because of the underutilisation of the prime minister’s Economic Relief and Support Package. It is more appropriate to collect taxes when economic activities exhibit an upward trend. In 2019-20 agriculture was the only segment of the economy that recorded a growth of 2.7pc, up from 0.6pc in 2018-19. The economy contracted by 0.4pc.

Rich farmers can meet their income tax obligations. According to field investigations in selected areas organised by an independent body some time ago, the actual farm size of upper-end families, in terms of ownership and control, ranged between 3,000 acres to 10,000 acres.

The landed gentry is also the main beneficiary of the support prices of wheat and sugarcane crops and avails a big chunk of the overall credit volume. In the fourth quarter of 2018-19, only 1,825 growers owning more than 100 acres category received Rs94bn out of the total credit of Rs200bn. The rest was distributed among 516, 547 other borrowers with lower landholdings.

There is a need to conduct a study whether an investment or economic activity has increased in a specific sector as a result of tax exemptions and reduction in tax rate or has only been done due to pressure groups or parties, says the chief of the FBR’s Income Tax Policy Reforms unit.

Reema Masud is concerned about the phenomenal increase in tax expenditure (cost of tax exemptions reductions/tax credits) from Rs540bn in 2017-18 to Rs972bn in 2018-19 and to Rs1.15 trillion in 2019-20. She says the government should look to other ways and not tinker with the tax codes.

She argues that it was not fully proved that tax credits and exemptions granted by the government have resulted in improvement in the manufacturing sector, exports or investments.

One reason for low AIT collection is that the grower has been given the option to either pay income-tax or land revenue. And Pakistan is stuck with traditional farming with no meaningful investment in modernisation or improvement in per acre yield. In some cases, productivity has fallen.

However, taxpayers have their own issues with the government as voiced by them from time to time: extractive tax policies, business stifling regulations, repressive and retrogressive tax regime. They also complain about exorbitant energy charges, abnormal volatility in exchange and interest rates and the high cost of doing business.

Both the economic agents and the government need to realise that business as usual will not work.

Published in Dawn, The Business and Finance Weekly, August 17th, 2020