Last month, the Punjab Assembly took the lead in amending its agricultural income tax (AIT) law, increasing the maximum tax rate from 15 per cent (in Punjab and Sindh) to align with federal income tax rates for individuals and businesses, which reach up to 45pc.

Other provinces are still deliberating similar changes, all in response to strings attached to the ongoing International Monetary Fund (IMF) programme.

However, critics of AIT argue that historically, agriculturists have been consistently paying not only explicit taxes (direct and indirect) but also heavy implicit taxes — income loss to farmers due to government policies that favour urban consumers and the industrial sector. Such implicit taxation, which manifests in various forms, has largely been overlooked by those who vigorously advocate for imposing comparable AIT.

Implicit taxation in Pakistan primarily stems from the government’s longstanding policy of controlling prices of agricultural inputs as well as outputs — major crops like wheat, cotton, sugarcane, and rice (until 2009-10). Recently, the Punjab Government enacted the Punjab Price Control of Essential Commodities Act 2024, which further broadened its authority over the pricing, movement, and distribution of almost all agricultural inputs and outputs.

Using this act, in July 2024, the Punjab Government capped district-specific wheat prices between Rs2,800-3,050 per 40kg — well below farmers’ production costs, import parity price, announced support price for 2024, and even prevailing market rates. The objective was to lower the price of ‘roti’ in urban centres. However, this single measure effectively transferred hundreds of billions of rupees from the agriculture sector to other segments of the economy — a classic example of implicit taxation.

Justifying high AIT using the 1.12pc of large landlords controlling 22pc of Pakistan’s land risks overburdening the agriculture sector

Similarly, in April 2022, the international wheat price was $480 per metric tonne, yet the government support price was just Rs2,200 per 40kg. With this, Rs1.3 trillion was taken out of farmers’ pockets in a single year.

Although there have been years when farmers got higher support prices than global prices, a 50-year analysis reveals that, contrary to general perception, farmers have, on the whole, received lower rates. On the other hand, the government succeeded in ensuring national food security — sometimes through compulsory procurement at unfavourable rates — and stabilising wheat prices for consumers.

The textile sector, Pakistan’s largest export contributor, offers another illustration. Its growth and success relied on implicit taxation of agriculture, with cotton being procured from farmers at prices consistently below global prices for decades.

Another prevalent form of implicit taxation used by the government is inter-district and inter-provincial restrictions on the movement of wheat and other agricultural produce, preventing farmers from securing better prices in other parts of the country. Similarly, export bans on agricultural produce are occasionally enforced to manage price hikes in the country, depriving farmers of the opportunity to earn higher returns in the international markets.

Likewise, farmers also face significant financial setbacks when district administration determines the prices of milk, mutton, and beef, altogether ignoring farmers’ production costs and the principles of free market economy. Similarly, deputy commissioners regularly visit fruit and vegetable markets to influence ‘arthis’ to lower prices, disregarding the losses farmers incur during market gluts.

On the flip side, like most countries (developed and developing), Pakistan has also subsidised agriculture primarily through reduced electricity tariffs as well as tax and duty concessions. However, cash subsidies (fertiliser or seed bag coupons) or in-kind support have largely been insignificant.

Most of these subsidies have been fully or partially withdrawn in recent years. Over the past three years, the electricity tariff of agricultural tubewells has increased fourfold, nearing the industrial tariff. Moreover, only a small fraction of farmers benefited from the reduced tariff, as hardly 20pc of tubewells are electric, with the rest being diesel-operated.

The government provided gas to fertiliser manufacturing plants at a lower tariff, but this benefit has not fully reached farmers, as evident from the manufacturers’ significantly higher return on equity and profits compared to their regional counterparts. Instead, farmers have been compelled to pay Rs500-1,000 per urea bag above the notified prices in recent years due to exploitation by the fertiliser mafia.

The Punjab Government is currently dishing out subsidised 9,000 tractors and 2,500 solar tubewells. However, promoting already established and widely available technologies to a limited group raises serious doubt about their effectiveness in driving meaningful sector development. Similarly, the Kissan Card, which provides smallholders with interest-free bank loans, serves hardly 10pc of total farmers.

In short, the implicit taxes on agriculture significantly outweigh the subsidies provided, rendering farmers fundamentally different from individuals and businesses in terms of taxation.

In reality, the potential of AIT is being overstated. Only 1.12pc of large landlords (92,919 in total, as reported by the Agricultural Census 2010) own over 50 acres, collectively controlling 22pc of the country’s land.

Nearly half of this land is uncultivated, predominantly in Balochistan. Using this small group to justify high AIT on an already overburdened agriculture sector risks stifling investment and growth while limiting its positive spillover effects on retail, services, and manufacturing. This is particularly concerning, given the government has no clear investment plan for sector development and growth.

In conclusion, under IMF conditions, the government is gradually moving towards reducing its control and plans to discontinue support and indicative prices for major crops. In this context, if the government seeks horizontal equity in taxation — people with similar incomes pay equal taxes — the principles of justice and the foundations of a free market economy certainly necessitate the removal of all implicit taxes and restrictions, often justified in the name of national food security and curbing food inflation.

In that case, the government should focus on its role of ensuring well-functioning agricultural markets, free from distortions, while providing consumer subsidies to ease the public’s burden.

Khalid Wattoo is a farmer and a development professional, and Dr Waqar Ahmad is a former Associate Professor at the University of Agriculture, Faisalabad.

Published in Dawn, The Business and Finance Weekly, December 9th, 2024