The government has announced the Federal Budget for FY2023-24 with Rs. 7.57 trillion in fiscal deficit which will be met by new loans and taxes. The Finance Ministry has announced some new taxation measures, even taxing the corporate income that is already taxed, but what about the sector that contributes most to gross national output?
During FY 2021-22, agriculture’s share in GDP was 15.9 trillion, but total income tax collection from the sector was only Rs. 2.8 billion or 0.01 percent of agriculture GDP, as reported in the respective white papers published by provinces.
Although section 41 of the Income-tax Ordinance 2001 exempts the agriculture sector from federal income taxes, provincial income taxes are still applicable, but the figures are near to nothing.
Punjab Agriculture Income Tax law includes both land base taxes that vary between Rs. 100-350 for land holdings exceeding 12.5 acres and Agriculture Income Tax that ranges from 5 percent on income less than Rs. 1 million to up to Rs. 22,000 fixed plus 15 percent on income exceeding Rs. 3 million.
| (1) Where the total income does not exceed Rs. 100,000/- | 5% of total income |
| (2) Where the total income exceeds Rs. 100,000/- but does not exceed Rs. 200,000/- | Rs. 5,000/- plus 71/2% of the amount exceeding Rs. 100,000/- |
| (3) Where the total income exceeds Rs. 200,000/- but does not exceed Rs. 300,000/- | Rs. 12,500/- plus 10% of the amount exceeding Rs. 200,000/- |
| (4) Where the total income exceeds Rs. 300,000/- | Rs, 22,500/- plus 15% of the amount exceeding Rs. 300,000/- |
Punjab Agriculture Income Tax Rates per Agriculture Income Tax Ordinance 1997
Sindh Agriculture Income Ordinance also includes income tax that ranges between 5 percent on income anywhere from Rs. 1.2 million to Rs. 2.4 million and up to Rs 300,000 plus 15 percent of the income exceeding 4.8 million. All of this in theory should have collected a lot more than Rs 2.88 billion but taxing a quarter of our GDP is not so simple.
For starters, there is an obvious lack of will within both provincial and federal quarters to broaden the tax base into agriculture given the vested interests of large landholders sitting in power corridors. Secondly, successive governments have been addicted to indirect taxes that are easy to manage and less politically sensitive in contrast to structural reforms that will cost them the political backing of one group or the other.
Because of that, no single initiative has been taken to streamline this agriculture income tax despite the continuous claims of digitizing outdated and vague land records. Tax education within the farming community is also non-existent meaning the majority of them are simply unaware or lack the understanding to comply with burdensome procedures of income tax regulations.
“Tax authorities face challenges in monitoring and ensuring compliance due to limited funds, lack of proper infrastructure, or the will to get the individual under the tax bracket,” stated Hamza Nizam Kazi, Head of Legal Affairs at Jaffer Brothers.
He added that the people accustomed to societal norms also compare themselves with other non-abiding individuals which along with the questionable interest of the government towards providing relief, breeds a lack of trust and unwillingness to comply. He also pointed out that the majority of farmers conduct their activities in readily available cash which makes it troublesome for tax authorities to track, assess and collect the income tax owed by the farmers.
While the agriculture income tax is a provincial matter after the 18th Amendment, taxpayers must declare this income in their federal tax returns to claim the exemption. But it has made matters worse by providing a back door for income tax evasion to people who are either never had agricultural land or operate farmhouses that generate mysterious huge sums that no one would dare to verify, but tax evasion is a cane of worms for another day.
If we look at the history of agriculture income tax in the sub-continent, it has been a taboo subject. British Raj imposed agriculture income tax in some form between 1860-63 and 1869-73 but later put it in the drawer when it started gathering local support by appointing landlords who would later exploit the tenants. Even after the independence, when some states in India touched the subject they either abandoned it quickly or halted its implementation.
While it takes two to tango, our messed up agriculture sector has been more of a ‘team effort’ at least. Successive governments have not done enough for farmers to claim the right to tax their income more aggressively. While the textile sector gets some relief and has even made strides when it comes to R&D, the same cannot be said about the cotton farmers.
There is a massive void of access to credit for farm operations without or on low markups. Although the government has announced some Rs. 10 billion for low markup loans in the budget, it is not even one percent of the total agriculture credit target and moreover, problems run deeper than that.
When the government is the biggest lender itself, most banks shy away from providing respect and conducive procedures to small landholders which goes a long way in driving a wedge between the state and farmers who take huge pride in their work and seldom has time for time-consuming procedures involved in requesting credit.
Lack of quality checks on inputs and absent infrastructure for farm-to-market also keeps the farmers’ minds off from paying agriculture income taxes in case they are aware of it.
“Creating awareness and proper tax education should be provided to farmers with a simpler way to submit tax returns where maximum information should be taken out with limited input,” added Kazi. He highlighted that the simpler tax returns, the easier it will be to track and trace and get them into the bracket to pay their due share.
He argued for easy loan processing by submitting collaterals to banks encouraging commodities markets to avail funds for harvesting and small agricultural associations can be enacted locally to assist farmers in registering and filing tax returns and getting subsidies for agriculture inputs. He highlighted successful agriculture income taxation models in Kenya, Brazil, and Mexico where there is progressive taxation on various income brackets.
Dr Kaiser Bangali, a renowned economist with four decades in the field also recently advocated against the feasibility of taxing agricultural income claiming a small percentage of large landholders. According to the 2023 State of Agriculture in Pakistan report by the Pakistan Agriculture Coalition and Pakistan Business Council, there are only 13,500 farms out of 8 million in total which are bigger than 150 acres, and they are unlikely to own cash reserves.
But even Dr Bangali admitted that exempting agriculture at the federal level is simply unfair and against the principles of taxing the income equally. The bottom line is, we already have agriculture income taxes at the provincial level in this country, so the question isn’t whether we should have it or not but whether someone is interested in implementing it thoroughly.
The current budget is populistic in its very roots with no difficult decisions which are the need of the hour, even no blank promises of structural reforms, and it’s unlikely that the future government will have a change of heart, but it’s inevitable.
It is only a matter of how much we are willing to lose before carrying out the course correction critical for survival and that includes streamlining taxes on agriculture income rather than having it as a tool to whiten the money.
