WHO should tax the agriculture income--the Central Board of Revenue (CBR) or the provincial revenue department? The official opinion seems to be divided. In a recent report on “Securing Sindh’s Future”, prepared jointly by the World Bank and the Asian Development Bank, the donors supported Sindh finance department’s proposal for transferring farm income tax to district governments.

But later reports indicate that the CBR has been advised by the president to prepare a blueprint to boost revenue from agriculture income tax (AIT). The CBR may be empowered to collect the AIT either on behalf of the provinces or it may centralised as in the case of sales tax.

Yet another question is : will the federal government succeed in taking over IAT from the provinces in an election year when the national and provincial assemblies are dominated by landed gentry and the political situation is gradually heating up. Can the government take a constituency on which it substantially bases its political support?

After seven years of rule, the regime also suffers from an authority deficit. Agriculture is a provincial subject and so is the tax on farm incomes. If the big farm owners are persuaded to pay taxes, agriculture with its of 22 per cent of the share in GDP has the potential of emerging as a major source of revenue for the provinces, handicapped so far by poor revenue- yielding taxes. The collection of sales tax which is normally a provincial tax in most countries, has been taken over by the central government.

The World Bank report says “ There is considerable merit in the Finance Department’s (Sindh) suggestion of devolving the tax to districts as this would not only provide the district with one major tax base to utilise, it will also remove the problem of adverse incentive as the tax would then be levied and collected by the same level of government.”

With the tax-to-GDP ratio at the low level of 10.5 per cent , the government and particularly the CBR , is under pressure to enhance the revenue from areas that are either under-taxed or not taxed at all. The taxation system is devoid of equity.

These include poor collection of taxes on farm incomes. Nearly 45-50 per cent of the direct taxes are raised from withholding tax that is passed on to consumers who are heavily taxed in variety of other ways. The CBR thinks that given the responsibility, it can initially raise revenue from an estimated Rs2 billion a year to Rs60-70 billion per annum.

This optimism is not backed by its own performance in case of tax evasion in urban areas despite the reforms.

While volumes are low, .efforts by provinces seem to have been stepped up as indicated by the rise in income tax revenue in the past two years. . Punjab’s revenue from farm incometax jumped up from Rs735 million in 2005 to Rs1312 million in 2006 and is estimated at

Rs1493 million for this year. Simultaneously, Sindh ‘s collection went by 50 per cent from Rs197 million to Rs300 in 2006 with anticipated revenue of Rs450 million for 2007.

It has been generally acknowledged that the tax administration has improved as indicated by increasing provincial tax revenues but further efforts are needed to strengthen the tax administration. Highly skilled persons need to be inducted and tax records are required to be computerised specially in the provincial boards of revenue. Instead,. surprisingly, the federal government is considering taking over the agricultural income tax collection.

The World Bank report notes that there is considerable overlap in federal and provincial taxes. Similar is the situation of expenditure side in respect of health, education and many other areas of governmental activities. For example, the federal government has levied commercial vehicle tax (CVT) and withholding taxes on motor vehicle which has a provincial tax base. And the provincial infrastructure development cess is levied on imports which is a federal tax. The government does not abide by the constitutional rules.

In case of over-centralisation of collection and distribution of taxes, sharing of the tax proceeds becomes a contentious issue between the federation and the provinces and among the various provinces themselves. The political disharmony thus created is further aggravated by ad hoc and arbitrary decision- making by the Centre. Political economy is made to suffer from federal deficit, democratic deficit and legitimacy of authority.