It provides specifically for (i) an integrated tax administrative body at the Federal Board of Revenue (FBR), ( integrating, both the income tax and sales tax administration), (ii) audit as part of a risk-based strategy to be implemented by end December 2008, (iii) a description of the required reforms, together with an action plan to be provided to the IMF within the same period, (iv) a plan to harmonise the income tax and GST laws, (iv) reducing exemptions in both these taxes, (v) legislative amendments, as required, by end June 2009.

It also requires FBR to hold a seminar to review tax policy and administration. Accordingly, the FBR held a three-day moot on “Tax Policy Options.”

Addressing the seminar, the Advisor on Finance, Shaukat Tarin said that the significant sources of both income and sales tax were mostly outside the ambit of taxation such as agriculture sector. The wholesale and retail trade sectors pay little or no taxes and professional services contribute less than what is due from them. Similarly, there is no effective way of taxing the capital gains on property and capital market. He opposed numerous exemptions in the tax systems which erode the tax base.

Whatever Shaukat Tarin says is not anything new. The tax policy is inequitable and suffers from distortions and does not provide level playing field to all taxpayers. Most notable is the agriculture sector which the FBR estimates could contribute Rs60-70 billion per annum.

However, his statement that the government was determined to take the most difficult decisions to reform the tax policy as per international practice, does not inspire confidence in view of the attitude of the parliamentarians on the issue. They have collectively warned the government that any move to impose agriculture tax will be firmly resisted. The public representatives have opposed tax on agriculture income at a time when the country is facing a dire financial squeeze.

The move was opposed on the ground that the farm sector is already overburdened with indirect taxation and also pays a number of direct taxes such as land revenue, local tax, and Ushr. Meanwhile, the rise in the input cost has made the life of the growers miserable. The agriculture tax controversy arises due to an unfair distinction made between agricultural and non-agricultural income. In fact, under the universal principle of taxation, the tax is levied on taxable income, irrespective of its source.

There is a need for a non-discriminatory taxation policy for any income generated through any legal source, to be taxed. It is necessary to remove misgivings of the legislatures by modifying the concept of tax on agriculture income. The tax will be levied on actual taxable income of individuals earned from sale of agriculture produce instead of on the basis of the size of the land holding.

The focus of the new strategy is to broaden the tax-to-GDP ratio, which is one of the lowest in the region. The levy of tax on agriculture income will enhance tax-to-GDP ratio and will bring it at par with that of other countries in the region. Agriculture accounts for nearly 22 per cent of the GDP.

There are several factors that justify levy of tax on sale of agriculture produce. For instance, the exemption of agriculture from tax serves as a disincentive to those who pay taxes. It is also a source of tax evasion. In many cases, the income from non-agricultural sources is shown as agricultural income, resulting in creation of a huge underground economy. Further, untaxed income generated in rural areas is spent in cities on lavish houses, expensive cars and conspicuous consumption, casting shadows over socio-economic and political situation. Tax on agriculture will enhance domestic resource mobilisation as part of stabilisation and reform strategy, to meet the current financial crises.

The agriculture income tax in its current form is in fact a land tax as it is levied on ownership of land rather than on income. Assessing agriculture income on the basis of land ownership is as faulty as taxing business income on the basis of the size of the premises. Further, the agriculture incomes fluctuate considerably depending on a host of factors particularly weather conditions and water supplies. Output varies from place to place depending on land fertility and appropriate use of inputs etc.

The assessment of agricultural income is not an easy task under the present system as the agriculture tax is colleted by the provinces on the basis of the size of land holdings and has remained stuck at below Rs2 billion against FBR’s estimate of Rs60-70 billion per annum. It necessitates taxing the income earned on sale of agriculture produce.

The Constitutional provision is not an obstacle in imposing tax on agricultural income as former Prime Minister Mr Z.A.Bhutto removed the exemption of agricultural incomes from taxation through Finance Act 1977. Under this Act, this tax was to be collected by the federal government but the proceeds were to be deposited directly in the respective province account. But General Zia suspended this Act and restored tax exemption in 1979.

The mechanism provided in the said Act had properly taken care of compliance with the provisions of the Constitution on one hand and ensured the use of tax proceeds by the province from where the revenue was generated. The same pattern may be followed. It requires deletion of section 41 of the Income Tax Ordinance 2001 which exempts agricultural income from income tax, in accordance with the provisions of section 53 of the said Ordinance.

In case the government fails to tax farm income and opts for raising the tax rates (which the financial advisor has admitted, were high), or further burdens the existing taxpayers with new levies, it will encourage the culture of non-compliance and will defeat the objective of expanding the tax net. A narrower base with more taxes will not be equitable.