The PTI government is unable to carry out some basic reforms requiring constitutional amendments for the want of a two-third majority in the parliament.

A similar case cropping up now is the reported move by the Federal Board of Revenue (FBR) to make joint efforts with the provinces to realise potential revenue with the provinces from the currently low-yielding agriculture income tax (AIT). The International Monetary Fund (IMF) is pressing Pakistan to bring AIT under the federal domain.

The absence of coordination between the federal and provincial tax authorities on the exchange of relevant data and two different provincial modes of tax collections have enabled the farm lords to get away by paying a paltry amount of income tax.

Now the FBR has signed an agreement for data sharing with the Board of Revenue and Estate of Khyber Pakhtunkhwa to share specified digital data, including data about land/property ownership and agricultural income which will help the two sides to ‘impose their tax collection activities in their respective domain.’

In KP 6,140 tax filers had claimed an income of Rs2.7 billion from agricultural sources and claimed exemption from the FBR which was equal to the total countrywide AIT collection recorded in 2019-20.

In the 2021-22 budget, the KP government had exempted the agriculture sector from farm tax. Similarly, small growers were exempted from paying land tax. Now the FBR will help the province collect AIT.

The total tax collection from farm income in 2020-21 was Rs3bn or 0.2 per cent of agricultural GDP

To avoid a constitutional amendment, the FBR has informed the IMF that it is considering restricting the definition of agriculture income to only income from crops by amending section 41 of income tax law. This would bring income from rent on agricultural property, livestock and fish farming under the domain of federal income tax. The FBR hopes to collect Rs120bn in the initial years.

An initial potential of the total AIT revenue can be assessed from the 2019-20 FBR data which shows that a total of 161,069 filers countrywide declared an income of Rs79bn from agriculture sources and claimed tax exemptions. The FBR officials say a bulk of such income had not discharged provincial income tax liability.

The total tax collection from farm income in 2020-21 was Rs3bn or 0.2 per cent of agricultural GDP. On the other hand, says an analyst, Rs1.7 trillion was collected from the manufacturing and services sector, accounting roughly for 5pc of their GDP. The share of agriculture in GDP was less than 20pc. According to Special Assistant to Punjab Chief Minister Hassan Khawar, the countrywide AIT collection in 2019-20 was Rs2.75bn of which 74pc came from Punjab, 22pc from Sindh and about 3pc from KP and Balochistan together.

However, the legal position of the FBR move in getting AIT in the federal domain is not clear nor is its fate because of the presence of a strong feudal lobby within the government. Legal experts including the PTI’s Federal Law Minister Farough Naseem are also reported to have said that agricultural income tax is a provincial subject and cannot be transferred to the federal jurisdiction without a constitutional amendment.

Some argue that FBR’s move to increase AIT revenues may fail like its previous attempts. Back in 2013, the FBR introduced an amendment to Section 111 of the Income Tax Ordinance 2001 to clamp down on those evading AIT via tax exemption facility. But the effort was subverted by the feudal lobby. The FBR move will put the government resolve to a critical test especially when the general elections are not very far away. It may be noted here that the agreement has so far been signed by only one PTI-run province.

Similarly, the PTI government efforts to persuade the provinces to share federal expenses in the National Finance Commission were frustrated by the federating units.

The feudal lords prefer to pay the tax calculated by measuring the area under cultivation and yield per acre estimated by revenue officials — an outdated mode that should have been abolished long ago. The FBR’s offer of sharing farmers’ declared incomes under the federal tax exemption practice can be crossed-checked with the actual income tax paid to prevent tax evasion. This could also have been done much earlier.

It is vital to substantially boost the AIT collection and raise revenues to invest in social and physical infrastructure in order to spur the much-neglected farm modernisation for achieving food security, boosting production and processing of primary agricultural produce. That is why AIT collection should be fully retained by the federating units. To encourage tax compliance, some experts also suggest that AIT revenue should be spent in the district from where the tax is raised.

The constitutional amendments may become necessary when realities change over time but fiscal federalism, stifled by over-centralisation and hybrid democracy, still has a long way to go in Pakistan. The National Finance Commission (NFC) is stuck with the 7th award over the past more than a decade when it is constitutionally mandated to give awards every five years.

The review of multiple criteria for resource distribution — based on the federal principle of equity and equality of the federating units — has been long delayed as stipulated in the 7th NFC award to help less developed provinces and regions to come up with the developed ones. Neither the 18th Amendment nor the 7th NFC award has been fully implemented. Constitutionally the collection of sales tax on goods is a provincial subject but it has been retained by the federation.

Published in Dawn, The Business and Finance Weekly, November 8th, 2021