Pakistan is collecting around Rs. 4 billion in taxes from agriculture income instead of the potential of Rs. 150 billion, and there is a need to creating an environment to allow all equities to be equally taxed.
This was the crux of Pakistan Development Policy Series 2021’s fifth webinar of the series ‘Closing the Agricultural Tax Gap that was organized by the World Bank.
Experts added that while Pakistan’s large agrarian base contributes significantly to the real sector and employment, the share of agricultural income tax in Pakistan’s total tax revenue falls short of its true potential.
Khyber Pakhtunkhwa’s (KP) Minister for Finance and Health, Taimur Jhagra; Farmer and Co-Founder of Agriculture Republic, Aamer Hayat Bhandara; former Senior Economist at the World Bank and Fellow at the Consortium for Development Policy Research (CDPR), Dr. Hanid Mukhtar; former Secretary of Finance, Revenue, and Economic Affairs for the federal government, Dr. Tariq Bajwa; the former Chairman of the Federal Board of Revenue (FBR); and Senior Member of the KP Board of Revenue, Syed Zafar Ali Shah addressed the webinar.
The session was co-chaired by the World Bank Country Director for Pakistan, Najy Benhassine, and the Chairperson of the CDPR and the Country Director of the International Growth Centre (IGC) Pakistan, Dr. Ijaz Nabi.
Minister Jhagra said that the Government of KP has taken bold steps to increase the tax base and is effectively lowering the taxes rates in many places or is trying to get people on board to increase their trust in the tax system.
He said that the provincial tax revenue had increased from Rs. 30 billion to Rs. 56 billion in two years (Rs. 30 billion to Rs. 42 billion in the first year, and Rs. 42 billion to Rs. 56 billion in last year). It had not grown during the last few years and before that, the average revenue growth had been less than five percent a year. It has now achieved 75 percent in two years, and roughly around 35 percent a year over the last two years.
Minister Jhagra stated that it was noted that the previous reforms in the taxes of the Khyber Pakhtunkhwa Revenue Authority (KPRA) of sales tax on services, property taxes had helped to increase tax collection and had tried a few things this year. He added that the government has introduced steps in the agriculture sector, the first of which was taking land tax to zero.
He said “Effectively, there is a nominal payment for land tax which only contributed Rs. 70 million to the national exchequer. We have taken down that to zero and that means the small farmers does not need to bother with the patwari anymore”.
“The second thing that they did is alleyed the exemptions limit for the agriculture income tax from Rs. 0.4 million a year to Rs. 0.6 million with income tax regulations of Federal Board of Revenue (FBR) are followed for other income tax payments. Doing these two things leaves us with the third element where we believe between 40,000 to 100,000 individuals in the province who will have to actually declare their agriculture income tax, compute agriculture income and cost and actually revive the spirit of agriculture income tax,” he explained.
Minister Jhagra said that these steps had been taken in the budget and now post-budget work is being done to make it implementable.
“We are not doing this just that our agriculture tax will become higher. We do not sure that tax potential is correlated to the agriculture GDP, because across Pakistan, the land ownership is small, somewhere in 95 to 98 percent of agriculture, and we have very small farmers who are actually doing agriculture that supports families,” he revealed.
He stressed that they are not doing it for tax potential but are primarily doing it because it is the right thing to do, and the principle is that if it is income tax, it should be treated as income tax.
Dr. Tariq Bajwa said that the current agriculture income tax being collected is peanuts as compared to the potential for the agriculture income tax against the potential of Rs. 150 billion. “We are collecting Rs. 3-4 billion from the sector,” he remarked.
Equity demands that all income must be taxed equally and if equity is not equally taxed, loopholes within the tax system are created for tax avoidance and tax evasions.
Dr. Bajwa said that the agriculture lobby is strong and dominant in the national and provincial assemblies and it is difficult to amend or legislate. He added that of the total of the taxes that are being paid by the agriculture sector, including sales tax, customs duty is around 20 percent, so they are paying taxes but only the agriculture income part is not being paid.
The contribution of agriculture to the GDP is 19.2 percent, but the contribution of the crops sector to the GDP had been less than seven percent. The agriculture income tax laws only tax cultivated lands, so larger contribution to the agriculture sector is the sub-sector of the livestock sector, he added.
Dr. Bajwa said that the total contribution of the agriculture sector is close to around Rs. 3 trillion to the GDP of Pakistan. “If we take 7 percent of 19.2 percent, we are talking about Rs. 1200 to Rs. 1300 billion of crops sector contribution and around 35-40 percent of farms of the total area should be taxed,” he said.
“If 10 percent tax is applied to it, then tax collection should be Rs. 120 billion and with 15 percent it should be Rs. 180 billion so around Rs. 150 billion should be the tax potential but we are recovering around Rs. 3 billion,” he added.
Dr. Bajwa said that the FBR has started sharing information with the provinces and at least the Punjab is getting information of these income taxpayers who have also declared the agriculture income tax. He further said that the land record is not backed by National Identity Cards and that the system has made it difficult to catch the loophole.
He said that taxing equally is a question of creating an environment that is compliant by all the sectors, and is the norm and not an excuse for one sector.
Nabi said that agriculture is providing jobs opportunities and is a large part of the economy, but as a revenue base, it has not played the role as expected. For a variety of reasons, the total tax collection remains small even though the potential is around Rs. 70 billion.
“If we were collect all the Rs. 70 billion it could constitute a large part of expenditures. It was not treated as standard income tax. It is more in nature of land tax. The provinces may lack the expertise to collect it as proper income tax,” he said.
Benhassine tweeted that the share of agricultural income tax in Pakistan’s total tax revenue is just 0.06 percent of the GDP, and that the agricultural tax falls short of its true potential. He further stated that a tax on agricultural income can be an important source of revenue for an economy that is heavily reliant on agriculture.