Agriculture tax: sifting myth from reality

EVER since the PPP-led coalition government introduced the reformed general sale tax bill in the parliament, fiscal policy has emerged as a burning issue among analysts and opinion makers.
While the new taxation measure has drawn a lot of flak from the business community and political leaders, the government is caught up between the devil and the deep blue sea as it knows that there is a big hole in the public finances. Taxing agricultural income is not a new topic of public policy debate; however it has gained a new hype in the media in the wake of the RGST. Though there is a mushroom growth of literature on theoretical aspects of taxation, a good tax is one which not only can be implemented but should have minimum unintended consequences as well. . As a general rule and for a more holistic analysis it is helpful to answer the following questions when appraising any new tax. First, what will be the net revenue generated by the new measure i.e. whether it would be efficient? Second, whether imposing the tax and collecting the revenue is practically possible? Third, whether the tax would improve equity? Let us begin with the first question i.e. assessing the revenue potential of agriculture income tax (AIT). The AIT can be traced back to 1886 when after re-imposition of income tax by the British in India, agricultural income was exempted as land revenue and cess were the greater sources of revenue. Interestingly, those who paid land revenue preferred national income tax but their repeated calls were rejected by the then British Indian government. It was the Government of India Act, 1935 which transferred imposition of income tax to the provinces and since then it has stayed like this in both India and Pakistan. In terms of revenue generation, land revenue fell sharply from 40 in 1860 to nine per cent in 1947 and to less than 0.3 per cent of the total national revenue in Pakistan nowadays. In the developed economies, agriculture is not considered a source of tax revenue and an OECD publication concludes that tax concessions in OECD agriculture are more widespread and important than the attention paid to them would suggest. No reliable statistics on the revenue potential of AIT are available even though its advocates-both domestic and foreign- contend untiringly that while agriculture contributes about one-fifth to the national income, its share in the total tax revenue is negligible. Those who oppose AIT even

question this oft-repeated assertion by pointing to the implicit taxes on agriculture resulting from price controls. Now let us deal with the practicality issue. All prominent experts on tax policy agree that small businesses, services and agriculture tend to be the sectors where taxation is traditionally found to be difficult. Agriculture is commonly rated as the hardest of all. Reviewing the Indian experience, an Indian author concludes that agriculture taxation is even more problematic in the developing states as the practices of standard account keeping and payments through banks are missing in these countries. On the other hand, agriculture accounts for a minor share of GDP in the developed countries and consequently taxing agriculture is not a prominent issue for them. In fact, agriculture is negatively taxed on balance in the OECD countries. But in developing countries like Pakistan and India, agriculture still accounts for a significant proportion of GDP, i.e. 21 and 15 per cent respectively and therefore becomes an issue of interest in the fiscal policy debate. In theory, agricultural income should be taxed in the same way as other forms of income. But it is easier said than done as the difficulty is how to ascertain the declared income in the case of agriculture sector. The performance of Income Tax department in Pakistan is abysmally poor for even those sectors which are less hard-to-tax in other countries. How would it ascertain the declared income from agriculture? Not surprisingly, even though the laws provide for two alternative calculations of the tax, one based on land area and the other one on agricultural income, it is the land area method which is actually used in provinces. Owing to the administrative level difficulties, writers on fiscal policy also support a presumptive norm-based levy on land, in proportion to potential output as the basis of agricultural taxation. Finally, let us deal with equity considerations. It becomes a case of apocalyptic injustice when salaried people pay huge proportions of their hard earned incomes as taxes while big feudal lords roam around in glittering vehicles without paying a penny on their income. Such spectacles also instigate other taxpayers to lower their voluntary compliance and not to pay their taxes by evasion or avoidance. The upshot of the preceding analysis is that the AIT should be supported on the basis of equity principle. At the same time, however, we should not pin much hope on AIT in terms of revenue potential due to practicality issues. Currently, the tax-GDP ratio of about nine per cent is one of the lowest in the world and even lower than that of our neighbours like India and Bangladesh. If we want to increase this ratio to the agreed 14 per cent mark, the more reliable taxes like VAT and income tax should be the mainstay of fiscal

policy as agriculture tax cannot be expected to do this job. If all provinces are serious in implementing AIT, they will have to first modernise agriculture record-keeping. The constitutional restraints should also be seriously addressed by either including AIT in the concurrent list or by authorising the centre to collect it in the same way as they have done in the case of GST on services. Most importantly, the government should embark on a comprehensive tax reform so that the intertwined issues of revenue generation and equity are addressed in a more holistic way rather than in a piecemeal fashion.