Last Updated on: 25th July 2023, 01:24 am
Why is There No Tax On Agricultural Income?
The government has announced the federal budget for fiscal year 2023-24 with a budget deficit of Rs 7.57 trillion to be covered by new loans and taxes. The Treasury has announced new tax measures, including taxing already taxed company income. But what about the sector that contributes the most to the gross national product?
In FY2021-22, the share of agriculture in GDP was Rs. 15.9 trillion, but the total income tax revenue of the sector was only Rs. 2.8 trillion, or 0.01% of agricultural GDP, according to the respective white papers published by the provinces .
Although Section 41 of the Income Tax Order of 2001 exempts the agricultural sector from federal income tax, provincial income taxes still apply, but the numbers are close to zero.
The Punjab Farm Income Tax Act includes property taxes ranging from Rs 100 to Rs 350 for land larger than 12.5 acres and a farm income tax ranging from 5% over Rs 1 million to Rs 22,000 fixed rate plus Rs 15 on lesser incomes % on earnings over 3 million rupees.
| (1) Where the total income does not exceed Rs. 100,000/- | 5% of total income |
| (2) Where the total income exceeds Rs. 100,000/- but does not exceed Rs. 200,000/- | Rs. 5,000/- plus 71/2% of the amount exceeding Rs. 100,000/- |
| (3) Where the total income exceeds Rs. 200,000/- but does not exceed Rs. 300,000/- | Rs. 12,500/- plus 10% of the amount exceeding Rs. 200,000/- |
| (4) Where the total income exceeds Rs. 300,000/- | Rs, 22,500/- plus 15% of the amount exceeding Rs. 300,000/- |
The Sindh Farm Income Ordinance also provides for an income tax of 5% on income between Rs. 1.2-2.4 million up to Rs. 300,000 and 15% on income over Rs. 4.8 million.
In theory, all of this should have fetched much more than 2,880 crore rupees but taxing a quarter of our GDP is not that easy.
First, there is a clear reluctance to expand the agricultural tax base in provincial and federal counties, given the self-interests of the big landowners who occupy the corridors of power. Second, successive governments have been addicted to indirect taxes that are easy to administer and politically less sensitive, as opposed to structural reforms that would cost them the political support of one group or another.
For this reason, no initiative has been taken to simplify this agricultural income tax, despite ongoing calls for the digitization of outdated and vague land register entries. There is no tax education in farming either, meaning most of them simply do not know or understand how to comply with the cumbersome procedures of income tax regulations.
“Tax authorities face difficulties in monitoring and ensuring compliance due to limited resources, lack of proper infrastructure or willingness to put individuals in the tax bracket,” said Hamza Nizam Kazi, Head of Legal at Jaffer Brothers.
He added that people used to social norms also compare themselves to other disrespectful people, which coupled with the government’s dubious interest in providing aid, leads to a lack of trust and unwillingness to comply. He also pointed out that most farmers work with readily available cash, making it difficult for tax authorities to track, assess and collect the income tax owed by farmers.
Although the 18th Amendment farm income tax is a provincial matter, taxpayers must report that income on their federal tax returns to claim the exemption. But it has made matters worse by providing a backdoor to tax evasion for people who have never owned farmland or operated farms that mysteriously generate large sums that no one would dare check, but tax evasion is a worm rod for another Day.
If you look at the history of agricultural income tax on the subcontinent, it is a taboo subject. The British Raj introduced some form of tax on farm income between 1860-63 and 1869-73, but then pushed it back as they began to gain local support by appointing landowners who then exploited the tenant farmers . Even after independence, when some states in India took up the issue, they quickly abandoned it or stopped implementing it.
It may take two to tango, but our chaotic farming sector was at least a “team effort.” Successive governments have not done enough to persuade farmers to demand the right to tax their income more aggressively. While the textile sector has enjoyed some relief and has even made progress in research and development, the same cannot be said for cotton producers.
There is a severe lack of access to credit for operations with little or no margin. Although the government has announced a few rupees. $10 billion in budget low-margin loans is less than 1 percent of the total farm loan target, and the problems run deeper.
When the state is the largest lender, most banks shy away from offering respect and favorable procedures to small farmers, driving a huge wedge between the state and farmers, who take pride in their work and rarely have time. lengthy process related to the loan application.
The lack of quality control of inputs and lack of agricultural marketing infrastructure also prevent farmers from paying agricultural income tax if they are aware of it.
“Farmers should have better awareness and proper tax education, as well as an easier way of filing tax returns, where maximum information should be extracted from limited information,” Kazi added.
He pointed out that the simpler the tax returns, the easier it is to track them down and place them in the tax bracket to pay their share due.
He advocated easy loan processing by lodging collateral with banks, encouraged commodity markets to provide funds for harvesting, and smallholder associations could be formed locally to help farmers register, complete tax returns, and receive subsidies for obtaining agricultural resources. He highlighted successful agricultural income tax models in Kenya, Brazil, and Mexico, which have progressive taxes for different income brackets.
Dr. Emperor Bangali, a renowned economist with four decades of experience in the field, recently spoke out against taxing farm income, demanding a small percentage from large landowners. According to the 2023 State of Pakistan Agriculture Report by the Pakistan Agriculture Coalition and Pakistan Business Council, there are only 13,500 out of a total of 8 million farms larger than 150 hectares and are unlikely to have cash reserves.
But even Dr. Bangali acknowledged that the federal agriculture tax exemption is simply unfair and contradicts the principles of a just income tax. After all, this country already has an agricultural income tax at the provincial level. So the question is not whether we should have it or not, but whether anyone is interested in delving into it.
The current budget is inherently populist, there are no hard decisions of the moment, not even empty promises of structural reforms, and the future government is unlikely to change its mind, but it is inevitable.
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