ANY hope that the potential revenue of agricultural income tax (AIT) will be realised any time soon has been put to rest by recent developments.

On March 30, Punjab’s Finance Minister Dr Ayesha Ghaus Pasha revealed that the provincial government has decided to freeze a plan to bring agriculture into the tax net.

Policymakers think it is not the appropriate time to tax the sector, as its stakeholders are going through critical times, the minister told journalists in Lahore.

On the eve of the elections, the tax amnesty for businesses has been preceded by freezing of plans to boost farm taxes.

In a meeting of the National Finance Commission (NFC) on March 1, representatives of Balochistan and Khyber Pakhtunkhwa threw a spanner in the works when they declared that AIT was not a progressive tax.

KP finance secretary maintained that 94 per cent of the landholdings in the province were less than one acre while livestock comprised two-thirds of the sector. He argued that there was a need to bifurcate the two sectors while looking at the AIT potential.

This approach to tax farm income was also encouraged by the fact that there is no agricultural income tax in India and its farming is supported by heavy subsidies, an expert says.

“Our neighbouring country is giving subsidies to its farmers of a much bigger magnitude (than Pakistan) while we are talking about taxing the agriculture sector,” Dr Pasha told journalists.

Much of the agricultural and related activities are in the informal sector where the writ of tax authorities is weak and their reach limited

AIT has posed the most difficult challenge in provincial fiscal management for a variety of reasons. Much of the agricultural and related activities are in the informal sector where the writ of tax authorities is weak and their reach limited. The problem is further complicated by two different modes of tax collection: AIT and land revenue.

In the NFC meeting, Punjab reiterated its stand that AIT should be treated as income tax because landowners get their holdings bifurcated in order to avoid land revenue.

Supported by Sindh, Punjab also pressed the Federal Board of Revenue (FBR) that agricultural income, as declared by a person in the federal tax return, should be subjected to AIT of respective provinces.

This was only possible if the FBR shared the agriculture income declaration with the provincial governments and provincial boards of revenue.

The Federal Board of Revenue is finding its hands tied owing to secrecy clause in the Income Tax Ordinance that prohibits the apex tax-collecting authority from sharing any information about declared income with an outsider.

Apparently, there has been no move yet at policy level to remove the bottleneck, though FBR officials showed positive response in the NFC meeting to resolve the issue. An FBR member is reported to have advised Sindh to build its capacity so that it benefits from sharing FBR data it is seeking.

Though land records have been digitalised, they have yet to make any noticeable impact on AIT collection. There is a need for a culture change in the provincial revenue official to do away with a mismatch between latest technologies and current mindset of officials. One can only hope that the provincial government coming into power after the elections would accord the right priority to AIT collection.

On technical level, to overcome the AIT challenges the Sindh government is reported to have informed the last NFC meeting that it is reviewing its land tax and agricultural income tax policies.

Sindh has also proposed that provincial tax laws need to be harmonised. As far back as June 2011, a committee of federal and provincial ministers was set up to propose a uniform policy on agriculture income tax, which, in turn, had set up a sub-committee to look into the technical aspects of the matter. Punjab and Sindh submitted non-papers to the federal finance division while the two smaller provinces did not do so. No decision has been reached in this regard.

Tax experts say there is no legal hitch in Sindh taking a unilateral decision to implement its own proposals within its own jurisdiction. But the proposals are unlikely to be taken up in the next provincial budget expected to be announced on May 5. The ruling PPP is focused on power politics rather than populist policies, as it cannot afford to lose winning rural candidates at this point of time and owing to the stand taken by the three other provinces.

The rural aristocracy that dominates the countryside and the provincial assemblies is not convinced that AIT is justified owing to the raw deal agriculture gets in overall allocation of public investment.

Enough investment is not being made to uplift backward agriculture or modernise it. There is a huge transfer of resources from urban to rural areas, including through high farm input prices and low returns on bumper crops when market prices of primary produce fall either in local or international market. A glaring example is the controversy that surrounds sugar cane price every harvesting season. The worst sufferers are small farmers.

Land reforms, which spur economic growth and create a middle class, have been abandoned half way since the 1970s. The second reform announced by Zulfikar Ali Bhutto was annulled by Ziaul Haq to gain political support of rural gentry. All Asian countries with high growth rates had one common factor which is generally ignored in public debates, and that is land reforms.

The outcome is that the share in farming including livestock has dropped below 20pc of the national income that provides livelihood to 44pc of the country’s population. Rural poverty is inducing poor peasants to move to the overcrowded cities in search of jobs.

However, it can also be argued that big farmers are able to extract most favourable terms of trade under the provincial governments’ procurement policy and get subsidies on tractors, etc. Their big incomes are also eligible for tax payments.

Published in Dawn, The Business and Finance Weekly, April 16th, 2018