LAHORE: Punjab’s collection of agriculture income tax (AIT) has increased by slightly over 50 per cent to Rs2.1 billion from Rs1.4bn in the last five years but remains far below the province’s estimated potential and unable to become a major revenue generation source for the government.

A study, done a few years back by Institute of Development and Economic Alternatives researcher Anjum Nasim, had estimated that the agriculture sector had a tax revenue potential of Rs55-75bn from crop farming and land rental in the tax year 2010. The paper, using a more limited data set to project taxable income and using the tax rates applicable under the Finance Act 2012, had shown that the tax potential for the tax year 2013 was about Rs 30bn.

“The estimates continue to change from year to year, depending on production swings,” he told Dawn on Saturday.

According to the provincial civil accounts for the period between July and February, the provincial government has collected Rs1.54bn in taxes from agriculture against the target of Rs2.5bn for the present financial year. Last year, the eight-month collection remained slightly lower at Rs1.37bn.

Province’s eight-month AIT collection stands at Rs1.54bn

The AIT collection has marginally grown in the last couple of years because of the changes in tax rate slabs introduced in the budget 2019.

Discrepancies in tax rates

According to the AIT law, the annual farm income below Rs1.2 million is practically exempted from payment of tax with income ranging between Rs400,000 and Rs800,000 attracting just Rs1,000 as tax and between Rs800,000 and Rs1.2m, Rs2,000.

For annual incomes above Rs1.2m, it has three slabs with the lowest attracting 5pc of the amount exceeding Rs1.2m and the highest slab attracting Rs300,000 plus 15pc tax on amount exceeding Rs4.8m.

On the other hand, the personal income tax has six slabs with the lowest slab attracting a minimum of 5pc on amounts exceeding Rs600,000 but below Rs1.2m and maximum of Rs21.42m plus 35pc of the amount exceeding Rs75m.

“The wide discrepancy in the agriculture income tax rates and personal income tax rates on different incomes makes AIT very attractive for many to evade their personal taxes,” a provincial government official said.

He said the recent increase in AIT collection was because many people were showing their earnings from the other sources or businesses as income from their agriculture operations to take advantage of the lower AIT slabs.

“AIT in its present form has clearly become a major avenue for whitening the tax-evaded income and needs immediate reforms,” he added.

Mr Nasim notes in his paper that “taxing this [agriculture] source of income at rates applicable to similar incomes in other sectors of the economy will not only supplement the finances of the provincial governments but will also have an important symbolic value in terms of fairness and equity.”

Speaking to this reporter, he listed several reasons responsible for the wide shortfall in actual agricultural tax collection than its potential.

‘AIT is a tax on land, not income’

“One reason is that AIT is effectively a tax on land and not on income, and the provincial governments have not revised the tax rates to reflect the changes in the income potential from land. Thus, the tax as a share of income falls as agricultural income increases,” he said.

According to him, the land tax could be redesigned to reflect the changes in potential income from land and also distribute the burden of tax more heavily on larger landowners.

The lack of effectiveness of the tax administration, he said, was another constraint in the implementation of a modern income tax system in the agricultural sector. “In Pakistan, the provincial land tax and land administration system has been in place since the pre-independence period. These revenue departments may not be appropriate vehicles for collection of income tax.”

Moreover, the growth in the provincial share from the federal divisible pool of taxes under the National Finance Commission (NFC) award has also created a disincentive for the provinces to tap their own-source revenues. “Then the strong political influence of large landowners also constrains the growth of tax revenue from agricultural incomes. Political governments cannot risk resentment of their party members from the rural constituencies by attempting to institute AIT.”

He is also of the view that by bringing the taxation of agricultural incomes at par with incomes from other sources would help plug a major avenue for tax evasion, which is provided by the differential tax treatment of agricultural incomes to declare non-agricultural income as agricultural income and thereby escape the rates of taxation applicable to non-agricultural incomes.

Published in Dawn, April 4th, 2021