An exercise in fairness — revamping agri tax
Modern states finance social services for their citizens by collecting taxes. The states that collect taxes while balancing economic growth and redistribution can serve their citizens for their welfare.
This category of countries can also meet the people’s security and development goals. Unfortunately, Pakistan has one of the lowest tax-to-GDP ratios in the world, less than 10 per cent and thus, unsurprisingly, some of the worst social indicators regarding human development.
Ideally, all sectors of the economy, ie manufacturing, services and agriculture, need to be taxed equally, but this doesn’t happen in the political nature of the economies. In our case, the result is that the manufacturing sector bears the bulk of the tax burden and contributes 60pc of taxes while its share of economic activity is only around 20pc.
Given our large fiscal deficit, the tax on agriculture is inevitable. The recent legislation in Punjab has done away with the exemptions that many people, I believe in the industry, have been using to park their incomes as agricultural income to avoid taxes.
The question is, what will be the modus operandi for revamping the agriculture tax collection?
The collection of agricultural revenue is over a century old, and the process is entirely manual, with lower revenue officials negotiating the amounts with farmers to achieve targets set by senior officials of the Board of Revenue. The senior officials, on their part, have been content with the bottom line of “achieving the target” without bothering with the ‘how’ part of the operation.
Hypothetically speaking, a farm may be 100 acres with 10 family members each holding 10 acres and would be shown in the data as ten ‘small’ farms
Pakistan’s documented economy is nearly $300 billion, and its agricultural contribution is around 22pc of the pie. Some foolishly argue that agricultural income tax collection should be proportionate to its size in the GDP.
By the implication of this assertion, the tax chargeable on agriculture income would be to the tune of $66bn of the economic activity. Of course, this is not possible, and one will have to look at the farm ownership landscape in Pakistan.
Pakistan has around 8.26 million farms with a total area of 21.41m hectares and a cultivated area of 17.24m hectares with an average cultivated farm size of 2.1 hectares. The farm size data shows that 78pc farms are less than five hectares. The question would be, do they make enough money to be taxed?
The 2023 wheat crop was devastating in terms of the prices farmers got, and cotton was also severely impacted by unprecedented heat waves. Reports for current rice crop prices are also not encouraging as prices being attained by farmers are 25-30pc of last year’s prices.
Regarding the farm size debate, one thing no one has understood in Pakistan is that the area shown as farm size in government statistics is the farm shareholding, not the actual size of a farm. Hypothetically speaking, a farm may be 100 acres with 10 family members each holding 10 acres and would be shown in the data as ten “small” farms rather than one 100-acre farm.
This is going to be a challenge, and the government, with its manual ways of working, has no answer to this issue, and people will avoid tax falsely claiming the small nature of their farms.
The colonial masters of the past, who did not have the advantage of satellite tech, understood the complexities of farm documentation and opted for a presumptive land tax for barrage and rain-fed areas.
Now, it’s important to look into how the accountancies would be maintained to tax the farm income of Rs1.2m at 15pc, Rs1.6m at 20pc and incomes of over Rs5.6m to be taxed at 45pc and a super tax of up to 10pc on agri income when incomes are beyond Rs5.6m.
These are insanely large and unrealistic tax rates and would never be collectable — note large American corporations whose earnings are in hundreds of billions of dollars pay a tax rate of 21pc — but rather would certainly open the doors of corruption to harass poor farmers.
The farming community in Pakistan should not outright reject the agriculture income tax. They should debate with the government and lobby with international agencies about a level playing field, particularly the price suppression of farm produce.
Policymakers must be informed about infrastructure shortcomings and risks climate change poses.
The issue of price suppression is real, and recently, the Punjab government has developed a new department to effectively control agri-produce prices in Punjab.
The solution lies in a fair and tech-enabled agri-income tax mechanism where all stakeholders, from farmers to tax officials, devise a mechanism that serves the objectives of tax recovery and leads to agri-transformation in Pakistan.
The writer is a former chief conservator of forests in Sindh and a hands-on farmer.
Published in Dawn, The Business and Finance Weekly, December 23rd, 2024