KHYBER Pakhtunkhwa has witnessed a surge in tax revenue from farm incomes since the introduction of partial tax reforms.

A historic growth of almost 44pc was recorded in the collection of land tax and agricultural income tax (AIT) in the last fiscal year. The two levies fetched Rs31.552m in 2013-14, up from Rs21.956m in the previous year.

But the actual collection has fallen short of the estimated AIT potential. As per land tax slabs of the ordinance levied on cultivated land and the land record of provincial planning department’s Bureau of Statistics, the land revenue should have been Rs223.23m But for 2013-14, the government had projected revenues of Rs31m, Rs2m of which was to be collected as AIT.

There are two taxes that apply to landholders in the province: the land tax and the AIT. Major discrepancies are noted between the expected and actual taxes collected from both categories.

As part of the 7th National Finance Commission Award, all four provinces were required to supplement the centre’s efforts to increase their owm tax-to-GDP ratio to 15pc by terminal year 2014-15. But it will actually end up at slightly over 9pc, showing a dismal performance.

The linking of the agricultural income tax to the fixed per-acre assessment is a great handicap in realising its full revenue potential

On the agricultural income tax, the only province which took new measures to improve collection was KP. A senior official of the province’s finance ministry said the provincial government took several measures to broaden the agricultural tax base. All persons who declared agricultural income in their tax returns for the tax year 2013 received from the Federal Board of Revenue were brought under the AIT in KP.

Moreover, the filing of agricultural income tax return was made mandatory for owners and cultivators with 12.5 acres or more of cultivated irrigated land, 25 acres of cultivated un-irrigated land or mature orchard, having a net income of over Rs100,000. Earlier, the filing of return was mandatory if landholding exceeded 50 acres of irrigated or 100 acres of un-irrigated land.

But the KP government brought the benchmark to the lowest level. Similarly, all such persons have been asked to self-assess their agriculture income as well. This lowering of threshold for the filing of AIT returns has helped to a large extent.

As a result of all these changes, 4,799 people filed agricultural income tax returns in the province, up from 112. “Comprehensive instructions have been issued for activities from crop inspection, assessment of agricultural income, filing of returns and issuance of tax demand,” the official said.

According to official land record, there are 27,794 landlords owning land in excess of five acres, but the number of AIT payers is still very low.

The province is still facing challenges in broadening the AIT tax base. The ambiguity had started with the application of the law for assessing and collecting AIT. The revenue staff calculated the AIT on the basis of the flat rate of the land tax, instead of assessing annual incomes derived from landholdings in a year as prescribed under the AIT Ordinance 2000.

As a result, AIT collection is confined to four districts: Peshawar, Mardan, Charsadda and Dera Ismail Khan. This has provided room to landlords to minimise their landholdings to evade taxes by transferring ownership on paper to their relatives and servants. However, the recent reduction in the benchmark for filing AIT returns helped bring Swabi district under the AIT net.

At the same time, fragmentation of land in these districts has not only led to tax evasion, but also reduced the numbers of AIT taxpayers. And the other 12 districts of the province were automatically exempted from the levying of the agricultural income tax because there is not a single person holding over 12.5 acres of land.

The linking of the AIT to the fixed per-acre calculation is a great handicap in realising its full revenue potential. An assessment report of the Board of Revenue shows that annual income from irrigated land in Mardan is approximately over Rs10,000 per kanal (Rs80,000 per acre), while the minimum is Rs300 per kanal in Karak district.

On the implementation side, the KP government has initiated the computerisation of land records and increased the perks and privileges of the patwari, the focal person who collects the AIT.

Published in Dawn, Economic & Business, February 9th, 2015

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