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Agricultural Taxation In PAKISTAN…
Why agriculture tax could not be implemented in Pakistan yet….!
Nimra Waseem
Qamar Abbas
Ali Iftikhar
Ramzan Razaq
Shahab Ashfaq
Introduction • The agriculture sector is the ministry of Pakistan's economy. It accounts for around a
quarter of the gross domestic product and provides employment to 45% of the population.
• Further more, it has provided much more momentum to economic growth and is expected to continue.
• Because the rural income is growing, so the demand of taxing the agricultural income has gained the new importance.
• Between 2001 to 2008 around 329 billion were transferred to rural areas due to high price of major crops, how ever, in 2010 to 2011 alone 342 billion were transferred. Now this rate has decreased.
• While the agricultural sector contributes to around quarter of the GDP, its contribution to tax revenue is at 1 percent constant.
• Any move to impose agricultural income tax is
how ever, mostly opposed by Political parties,
Public representatives with agricultural
background and organizations such as farmers
associates Pakistan (FAP)
• The issue has been on table for the last decade
during the time the tax to GDP ratio has varied between 9 to 11%. Presently it is 8.9%.
History and legal frame work
Agricultural income is defined in the 1973 constitution (Article 260 (1)) as follows:
• “agricultural income” means agricultural income as defined for the purpose of the law relating to income tax.
In the Income Tax Ordinance 2001,
• Any rent or revenue derived by a person from land which is situated in Pakistan and is used for agricultural purposes
Since 1996 all four provinces have instituted some form of tax on agriculture land or incomes. In its implementation this tax is largely a land tax rather than a tax on
agricultural income.
Some Basic reasons for why agricultural income cannot be taxed in Pakistan…!
It is very easy to say that like other sectors, income from agriculture should also be taxed but firstly it is already taxed and secondly its assessment and collection is very difficult and
impracticable because of many reasons e.g.
(a) It’s not possible to calculate agriculture income and tax on the income as compared with other sectors.
(b) The performance of Income Tax department is already unsatisfactory in already taxed sectors where they collect around 63% of the tax collected as advance tax.
(c) It would not be possible to calculate the agri income under the present system of tax assessment system.
(d) Income from agriculture is already taxed and collected by provinces in two modes as under
1. Payment of Tax on the basis of ownership of Land.(fixed)
2. Payment of Tax on the basis of income from agriculture.source
Agriculture Income Tax – “The Reality” by
(Dr. Mohammad Tariq Bucha) President Malik Khuda Bukhsh Bucha
Agriculture Foundation and Director & Chief Coordinator Farmers
Associates Pakistan (FAP)
Further from the same source
According to an Indian writer \ researcher, agriculture
tax in under developed countries is very difficult
because most of the transactions of income &
expenses are without receipts.
On the other hand, agriculture tax has very nominal
importance in developed countries rather it is almost
nil in developed countries
As is in under developed countries like Pakistan &
India where its contribution in GDP of the country is
24% & 15% respectively. A figure often discussed &
quoted in media and the economic policies
Land revenue rates under Punjab agricultural income tax act 1997
Land ownership tax
Up to 12.5 acre No tax
12.5 to 25 acre Rs 100/ acre
16 to 50 acre Rs 250/ acre
50 acre or more Rs 300/acre
For the next fiscal year, the government set the target of Rs2.01 billion for the agriculture income tax
Amendments As per the major amendments introduced to this Act in 2001, holders of 25 acres of irrigated
land (equivalent to 50 acres of un-irrigated land) were required to
submit their AIT return
• Despite an announcement last year, the income-mode of the tax was, however, not practically implemented due to capacity related issues of the collectors in the field
• The collection from this tax has been declining in recent times, according to the new budget document.
Failure of provincial tax collection system
• Sarfraz Khan, former member Federal Board of Revenue (FBR) and central leader of Kissan Board Pakistan, said the department concerned has badly failed in engaging farming community on this vital issue. The farmers were not taken into confidence at the time of the formulation of the new mechanism of agricultural income tax collection.
• Khan said that provincial machinery was also not capable to audit and assess taxable areas of the agriculture sector. The biggest issue is capacity as well as will of the people concerned, he observed
Source
http://www.thenews.com.pk/Todays-News-3-256010-Punjab-misses-agriculture-income-tax-target
Provincial agriculture tax in million Pk rupee
2011 to 2012
Punjab 670
Sindh 189
Khyber pakhtun khwa 20
Baluchistan 1
total 880
Total provincial revenues 0.13
Total tax revenue 0.08
Agriculture Land Ownership in Pakistan(As per Agriculture Statistics 2000)
source Agriculture Income Tax – “The Reality” by
(Dr. Mohammad Tariq Bucha) President Malik Khuda Bukhsh Bucha Agriculture Foundation and Director & Chief Coordinator Farmers Associates Pakistan (FAP)
Land Ownership Less than 5 acre
(%)
5 to 25 acres (%) 25 to 50 acres (%) 50 acres and plus
(%)
Pakistan 61.00 33.00 4.00 2.00
Punjab 61.34 34.00 3.40 1.40
Sindh 42.50 46.00 7.70 4.10
KP 79.00 18.00 1.70 1.16
Balochistan 30.00 52.00 10.70 8.00
AGRICULTURE INCOME TAX , THE DEBATE
ARGUMENTS IN FAVOR OF AGRI INCOME TAX
FIRSTLY
• The present economic situation of Pakistan requires for the government to raise the revenues in order to lift the tax to GDP ratio and in order t meet the revenue and fiscal targets.
• In order to improve the low growth rate and high
inflation funds should be raised.
SECONDLY
• There has been a structural shift of incomes towards
untaxed sectors which requires the broadening of the
tax base. Because rural incomes have been rising, a
window is now open to tax farm incomes to fund
Development
Further
ThirdlyAgricultural tax can be made progressive. I-e, those who earn more pay more. This is tied to the fact that many rich land lords do not significantly contribute to the tax revenue.
Fourthly
Agriculture should not be given special treatment as the exemption from income tax for this sector is not supportable on the grounds of equity.
Further more
FIFTHLYDiscrimination against the agricultural sector through the imposition of low prices has diminished in the past decade and now the sector has untaxed potential because of the decline of the implicit taxation.
SIXTHLY• Cultivation intensity has been growing
inversely with the farm size in Pakistan.
• As the farm side increases the efficiency with which it is cultivated decreases
• There fore the higher tax rate on larger farms will give more output from landlords.
ARGUMENT AGANST AGRICULTURE TAX
These include
• Agricultural income is already taxed by provincial agricultural income tax ordinance
• Rich landlords are not in majority and there for the revenue potential from the sector is not as high as claimed.
• The agriculture income tax will only burden
the poor farmers and in return effect the
performance of the entire sector
Further
• The percentage of larger land holdings has decreased due to inheritance law, conversion of agricultural land into residential colonies between 1970 to 1990
• Collecting direct taxes on agricultural income is a complex tax that is too difficult for the developing countries to administer.
• In addition to current direct taxation the agriculture is also paying indirect and implicit taxes.
Land
ownership
Less than 5
acres
5 to 12.5
acres
12.5 to 25
acres
25 to 50
acres
50 acres and
over
90.73 7.4 1.2 0.28 0.05
Who Bears the Burden of Taxes!
The case for treating farm incomes as business incomes for tax purposes is made on the ground that the differential treatment of agricultural incomes violates the principle of horizontal equity – equal incomes should be treated equally, and on the ground that by excluding agricultural incomes from taxation, a very large segment of the earning households are excluded from the application of the principle of vertical equity
Options for Agricultural Taxation
Taxation of agriculture incomes can takes place in a number of ways
• One of the earliest papers on agricultural taxation in Pakistan is by Hamid (1970) as,
Taxation Based on Land Area
• land taxes have a particular appeal because of their simplicity and presumed efficiency. Land taxes can be levied either with or without reference to the
Annual Rental Value and Site Value Taxes
• Taxes on pure rental income and site value are efficient taxes because they only take away some, and in the extreme case all, of the landowners’ rental income without affecting the supply of land or the level of output
• The capitalized value of the rental value of land is the site value of land.
Presumptive Income Taxes
• For the near future the tax will be some form of presumptive income tax that focuses only on crop
• A presumptive income tax would involve
estimating Gross Value of Output (GVO), subtracting
an estimate of cost of production (COP) and then
applying a tax according to a tax schedule that is
applicable to businesses in other sectors of the
economy.
Value Added Tax
• A comprehensive value added tax (VAT) can be designed in a way that the tax is effectively a tax on all consumption , irrespective of the source of income.
Taxing Agricultural Output and Inputs
• Distortionary taxation of outputs and inputs may also be desirable because of administrative difficulties in implementing efficient taxes such as land-based taxes.
• The efficiency of land taxes may not hold in the presence of imperfect insurance markets so output taxes or a combination of output and land taxes may be preferred to pure land taxes
FORMING THE IDEAL TAX POLICY
IT IS CLEAR THAT CURRENT TAXATION POLICY REQUIRES REFORMATION
In order to resolve the conflicting claims about the potential of the agriculture sector an expert panel consisting of economist specialization in taxation must be consulted in order to gain an accurate depiction.
Conclusion
The major conclusion drawn is that the current system of taxing the agricultural income is an inefficient and inequitable setup and that some frame of reforms in tax policy is necessary
Basically the tax could not be implemented because of its implemental structure is not much easy to apply in developing countries
Rich land lords always oppose any such bill or suggestion and the poor farmers are unable to pay the tax as they own little.
SourcesIncome Taxation Estimation of the Revenue
Potential in Punjab Anjum Nasim 10/14/2012
www.pildat.org Taxing the agricultural income in
November 2011
Agriculture Income Tax – “The Reality” by
(Dr. Mohammad Tariq Bucha) President Malik
Khuda Bukhsh Bucha Agriculture Foundation and
Director & Chief Coordinator Farmers Associates
Pakistan (FAP)
http://www.thenews.com.pk/Todays-News-3-
256010-Punjab-misses-agriculture-income-tax-
target
Thank you for you time
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