Taxing agri incomes

Published December 11, 2023
The writer is a former secretary, forests, and a hands-on farmer
The writer is a former secretary, forests, and a hands-on farmer

PAKISTAN’S inability to generate enough revenue means it invariably finds itself at the mercy of international lenders. Currently, we are signatories to an IMF deal that binds the government to increase overall revenue generation and improve the tax-to-GDP ratio which, in our case, is among the lowest in the world. This cannot be possible unless the state starts taxing all sectors of the economy equitably. This includes the rural sector, where great potential lies in efficiently taxing agricultural output.

Agriculture accounts for about one-fifth of Pakistan’s $350 billion economy. If the sector was contributing its fair share, a fifth of the current year’s tax collection target of Rs9,415bn would be coming from farm output. However, actual collection is a tiny fraction of the ideal amount. There is a need to correct the common misconception that agriculture is exempt from income tax. It is not. Income from agriculture is taxed like any other income as per the Income Tax Ordinance, 2001. The only difference is that this tax is collected by provincial authorities and not the Federal Board of Revenue.

Farmers and other interest groups advance various arguments against agriculture income taxes. They generally feel that since they are already heavily taxed indirectly, they should not be made to pay income taxes as well. They also complain of controlled commodity prices, which is an implicit tax on their incomes. However, while such complaints are not unreasonable, the doubling of wheat prices in 2022 has rendered price controls ineffective. In any case, other commodities like cotton and rice are free for export; in fact, the latter is encouraged for export under government policy. Sugar, among the major crops, is the only exception. It remains subject to strict government controls and usually faces export restrictions. To offset this, sugar import is heavily taxed in order to benefit local industry and large farmers.

Many tax experts feel agricultural taxes are unenforceable due to a lack of documentation of the economy and its vast geographic spread. Perhaps this is the reason why our colonial overlords levelled presumptive taxes on agricultural revenue and based it on land rental value instead of actual production or productivity potential. However, assuming there is sufficient commitment at the policy level, taxing agriculture should no longer be an issue in the age of satellite imagery and machine-learning technologies. In fact, farmers should advocate for such an approach if they want agriculture in Pakistan to formally be considered part of the larger economy and documented as a part of national supply chains.

The entire system must be modernised.

It is preposterous that agricultural revenue collection is still done manually by revenue staff as it was 100 years ago. In the prevailing system, if someone does not pay or is overcharged, there is no way of monitoring or to redress the injustice. Therefore, the time has come for the entire system to be modernised. In this regard, the lead has to come from the IMF, international lenders and bilateral donors, as our domestic system seems too subservient to vested interests which are unlikely to allow tech-enabled transparency in the farm and rural economies.

International lenders and development partners should provide grants to digitalise the farmlands and make land records easily searchable. As a second step, all imagery of farmlands should be made available year-round to individual farmers (irrespective of their landholding size) as well as to the government. The imagery service should enable farmers to assess the condition of their crop on a periodic basis (ideally, daily), and help the government monitor and aggregate crop data. This will greatly help the government in its tax collection, as not much can be hidden in this digital age. Lastly, machine-learning can help the government and farmers interpret this satellite imagery in depth and even assess the yield potential of various crops at the time of harvesting if the systems used to analyse the imagery are properly trained in this task.

Given Pakistan’s resource constraints, agricultural taxation as well as fiscal transfers need to be technology-based. At the farmer level, those who refuse to pay taxes must be penalised, for example by not being able to sell or gift their property to fellow family members without first clearing their dues with the government. This is only possible when farm and land records are diligently digitalised. Technology will also help net the large farmers, who account for merely four per cent of all cultivators but own nearly 40pc of all farmland. It will help recover hundreds of billions of rupees in agri income tax while also enabling modernisation of farming practices.

The writer is a former chief conservator of forests and a hands-on farmer.

Published in Dawn, December 11th, 2023

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