FINANCE Minister Ishaq Dar has taken the provinces to task for their ‘poor’ tax collection from the agriculture sector.

The irony is that agriculture sector has a share of 21 per cent in the GDP but its contribution to the exchequer remains less than 0.22pc of direct taxes. Taxing income from agricultural activities has been the domain of provinces, not the federation, even before the 18th Amendment was passed.

But the provincial governments have been hesitant and may remain so to tax income of the landowners because most of them sit in the assemblies and enjoy perks and influence and also have close connections with the civil and military elites. So, they have been charging only fixed tax on land holdings which rarely sees an increase.

Punjab collected farm income-tax revenue of Rs830 million, a low figure, in the current fiscal year against the target of Rs2.01 billion

Ishaq Dar also deplored the fact that the provinces, not being able to enhance the collection, are unwilling to let the federal government do the job. Although such a transfer of power is no guarantee to increased collection for the desired revenue, it involves an amendment in the constitution, which the feudal lobby may not wish to be adopted.

Meanwhile, it is quite confusing that some provinces are also taxing agriculture income with an alternative option to collect land tax. Punjab has in the 2013-14 fiscal year shifted its focus from land-based valuation system to income-based tax collection. This is a positive initiative.

Under the income-mode system, holders of more than 50 acres of land are required to submit their income tax returns like other tax-payers. But because of the capacity-related issues of the collectors in the field, income tax mode could not be fully implemented. So, the tax collection continued in the previous fixed mode system. As a result, Punjab collected Rs830 million, a low figure, in the current fiscal year against the target of Rs2.01 billion. However, it was still Rs110 million higher when compared to previous year’s figure. The target for next fiscal year remains unchanged.

In Sindh, the tax collected under income-mode from the agriculture sector is extremely low. It was initially estimated to be Rs468.6 million in 2013-14, but was revised to Rs426.5 million later, down by almost nine per cent. The target for tax on agriculture income for 2014-15 is Rs512.1 million. Khyber Pakhtunkhwa’s agricultural income tax revenue showed literally no growth for 2013-14 over its collection in 2012-13. This shows a lack of capacity or willingness to improve the system.

It was in 2012 that the provincial governments started implementing what was called ‘harmonisation of agriculture income tax policy in the provinces’ in line with the decision taken by all the four provincial finance secretaries. As a corollary, the provincial governments started taking steps for collecting agricultural income tax at local level. In the KP, the information provided by the income tax department on agriculture income, after district-wise segregation, was forwarded to respective districts for calculating agriculture income tax (AIT) and serving of tax demands.

Agriculture income tax is generally viewed as a difficult tax to collect. The impediments in its collection include uncertainty in the income due to vagaries of weather. Equally difficult is to convince the landowners to pay the tax. Often, their main argument is that agriculture is already overtaxed in the form of cane and cotton cess, sales tax on farm inputs, abyana and malya road taxes.

The fact remains that if any sector in the economy is excluded from income tax, it creates an incentive for people to evade taxes by showing income from other sectors as income from the agriculture sector. It also creates a disincentive for taxpayers when they see such a large sector, including a rich farmers group, not paying their due share of taxes.

The privileged status of the landlords was originally created by the British. It was the Bhutto government which repealed the 1922 income tax law in 1977 but in 1979 the Ziaul Haq government cancelled the 1977 measure and again exempted the agricultural income from any tax.

Published in Dawn, Economic & Business, June 23rd, 2014