The IMF And ‘Agricultural Income’ Tax Reforms

All of Pakistan's provincial governments have failed to impose agricultural income tax on wealthy large landowners, leading to the IMF imposing the condition of collecting taxes on agricultural income at federal income tax rates in the new staff-level agreement.

The IMF And ‘Agricultural Income’ Tax Reforms

Taxing agriculture is a core component of the International Monetary Fund's new program for Pakistan and is critical to its success. If the commitment is not followed, the program’s success will be at risk”—Nathan Porter, the IMF's chief of mission for Pakistan, Pakistan’s IMF’s program ‘at risk’ if agriculture goes untaxed, Nikkei Asia, July 18, 2024

At the same time, the provinces will take steps to increase their own tax-collection efforts, including in sales tax on services and agricultural income tax. On the latter, all provinces are committed to fully harmonizing their Agriculture Income Tax regimes through legislative changes with the federal personal and corporate income tax regimes and this will become effective from January 1, 2025—IMF’s Press release No. 24/273, July 12, 2024

Today, a mere 5% of large landholders in Pakistan are said to possess a massive 64% of the total farmland, while 65% of small farmers hold only 15% of the land (Nazeer 2015)”—Economy of Debt: Alternatives to Austerity and Neoliberalism in Pakistan [page 19] 

Dr. Pasha, as the lead author of UNDP’s latest National Human Development Report (NHDR) on inequality, talked about the gross disparities present in the country. As an example, the agricultural and population census shows that 1 percent of farmers in Pakistan own 22 percent of all farm area”—On Equity and Happiness: UNDP at the Lahore Literary Festival , February 26, 2019

“I think the landowners’ lobby is powerful in the assembly and they might not allow downward revision of non-taxable income. Instead of filing Agricultural Income Tax returns with the provincial governments, the same should be filed with the FBR that should solely assess/receive tax returns for agriculture and transfer it to the provinces as per their respective share like the gas development surcharge. Equity demands burden of taxation should be same for all”— Dr. Kaiser Bengali 

The staff level agreement reached between Pakistan and the International Monetary Fund (IMF), subject to the approval of the latter’s Executive Board, on July 12, 2024 on economic policies for a 37-month Extended Fund Facility (EFF) of about US$ 7 billion, and statements from Nathan Porter, the IMF’s Mission Chief to Pakistan, links the success of the 24th EFF program with the full harmonization of provincial “Agriculture Income Tax regimes through legislative changes with the federal personal and corporate income tax regimes” and “this must become effective from January 1, 2025.” The taxation of “agricultural income” at par with the prevailing burdensome federal income tax regime, if implemented, will have serious ramifications for the farmers with small and medium-size landholdings up to 25 acres.

The real issue with taxation of “agricultural income” is the fact that absentee landowners are not paying income tax on their colossal earnings from this source, or making negligible contributions, whereas small farmers, hardly earning any taxable income, are yet burdened with multiple federal and provincial taxes. Those having economically unsustainable holdings are facing exorbitant costs of inputs (seeds, fertilizers, pesticides, insecticides, electricity, diesel etc). With the ever-increasing prices of energy and POL products, agricultural income taxation at par with prevailing personal and corporate income tax rates, accentuated harshly in the federal Budget 2024-25, will pose an unbearable burden on them. It will further deteriorate their economic condition, pushing many of them below the poverty line. The existing higher cost of inputs, low productivity and lack of market access are their pressing issues, but no one is ready to address the same.

There exist many misconceptions about share of agriculture sector, 24% in the fiscal year 2023-24, as a whole in the GDP vis-à-vis the component of “agricultural income.” Many think that crops are the main output of agriculture sector, which in reality is not less than ten percent of GDP. According to Economic Survey 2023-34, “During 2023-24, the critical crops contributed 20.67% to value addition in agriculture and 4.97% to GDP. Other crops contributed 13.51% in value addition to agriculture and 3.25% in GDP.”

It needs to be emphasized that only “agricultural income” falls within the legislative competence of the provinces, while all other activities of agriculture sector (livestock, poultry, forestry, cattle farming, fish farming etc) are under the jurisdiction of Federal Board of Revenue (FBR). How much tax it collects from these activities in not made public by FBR! Even the most informed ones in our media and so-called intelligential have no idea as to what is “agricultural income” as per law and what is its real tax potential.

The federal government’s approach in not taxing “agricultural income” of the rich is no different within the federal boundaries of Islamabad, even though many wealthy individuals own agricultural farms and absentee landowners in rural areas are quite affluent. These landlords hold significant influence in national politics, federal and provincial assemblies.

The provincial assemblies, in terms of Article 142(c) read with Entry 47 of Part I of Federal Legislative List [FFL] contained in the Fourth Schedule to the Constitution have the exclusive authority to impose taxes on “agricultural income”, except in areas that fall within the domain of the federal government, known as Islamabad Capital Territory (ICT)—see Article 1(b) of the Constitution.

The National Assembly can impose income tax on all types of incomes except “agricultural income” as Entry 47, Part I of FLL reads: “Taxes on income other than agricultural income.” However, it may be highlighted that within the ICT, the National Assembly has the exclusive power to levy income tax on “agricultural income” as provided in Article 142(d) of the Constitution which says: “Majlis-e-Shoora (Parliament) shall have exclusive power to make laws with respect to all matters pertaining to such areas in the Federation as are not included in any Province.”

The definition of “agricultural income”, according to Article 260 of the Constitution, “means agricultural income as defined for the purpose of the law relating to income tax.” This is an exclusive definition meaning by that no other meaning can be assigned to it, except for the purpose of the law relating to income tax, which at present is Income Tax Ordinance, 2001section 41 of it exhaustively defines what is “agricultural income.”

It is shocking that despite the unambiguous provisions of the Constitution and principle of equity, none of the provincial governments has ever been inclined to collect tax from the wealthy and absentee landowners on “agricultural income” at the rate applicable under the Income Tax Ordinance, 2001 on non-agricultural income. This obviously has given an opportunity to the IMF to impose condition of collection of agriculture income tax by provinces as per federal income tax rates. The issue was highlighted by this scribe in a research paper, and a number of articles. The latest one published by Pakistan Institute of Development Economics (PIDE) is yet not considered by IMF, highlighting as to why National Assembly has yet not enacted agricultural income tax in ICT!

Income tax on “agricultural income” should not be levied, assessed, collected on per acre basis, but on a net income basis, as required by the Constitution. No province can disregard this command of the supreme law of the land. However, an unconstitutional practice has been ongoing since 1973, and all institutions, including the Supreme Court, remain a silent spectator on this vital matter that help the rich to amass more wealth at the expense of state treasury and the landless tillers.

Making the situation worse, poor farmers are exploited by the state, as they are subjected to heavy sales tax on agricultural implements, electricity, fertilizers, pesticides, insecticides, and other inputs, along with petroleum levy on diesel and petrol. In addition to numerous other levies, they also face abuses from the police, patwar (land revenue officials), and landlords.

The federal government’s approach in not taxing “agricultural income” of the rich is no different within the federal boundaries of Islamabad, even though many wealthy individuals own agricultural farms and absentee landowners in rural areas are quite affluent. These landlords hold significant influence in national politics, federal and provincial assemblies.

The Constitution empowers the National Assembly to levy income tax on “agricultural income” within the federal limits, but no legislation has been enacted for this purpose till today. This is because influential members of elites, who are favoured by the state with agricultural lands as rewards, earn income by renting it out, wielding considerable influence over elected governments and living opulent lifestyles at the expense of poor peasants.

Making the situation worse, poor farmers are exploited by the state, as they are subjected to heavy sales tax on agricultural implements, electricity, fertilizers, pesticides, insecticides, and other inputs, along with petroleum levy on diesel and petrol. In addition to numerous other levies, they also face abuses from the police, patwar (land revenue officials), and landlords. Multiple inquiry reports confirm that sugar barons do not provide fair compensation to farmers for the sugarcane they produce.

According to an op-ed of February 6, 2020 by a former federal secretary: “This [agricultural] sector is almost one fifth of the economy (18.9%) and generates more than $60 billion or 9 trillion rupees worth of gross income annually…”

The Tax Expenditure Report 2020 of FBR revealed that in tax year 2018 exempt dividend paid by corporate sector from “agricultural income” was Rs. 43 billion. The provincial collection of agricultural income tax in tax 2018 was Rs. 1,598 million. On the basis of Agricultural Census 2010 by Pakistan Bureau of Statistics, the Report claims: “If statutory slab-wise tax rates are applied on average income per farm for the six categories of farm sizes, the estimated revenue forgone due to this exemption comes to Rs. 69.5 billion annually.” It may be noted that farms smaller than 7.5 acres were excluded and Rs. 50,000 income per acre basis was assumed.

The failure to collect income tax on agricultural income as per the Constitution has led to significant revenue losses.

The four provinces, instead of levying agricultural income tax as per the Constitution and imposing progressive taxes like inheritance tax (estate duty), gift tax, wealth tax and capital gain tax on the wealthy class, collectively received Rs. 7,242 billion in fiscal year 2023-24 from the federal government under the 7th National Finance Commission (NFC) Award. At their own, they collected a meager amount of total revenues of Rs. 816 billion, with tax revenue of only Rs 650 billion. The collection under the head agricultural income tax in total tax collections was a mere 0.3 percent.

The above-mentioned facts highlight that the real problem does not lie with the Eighteenth Constitutional Amendment or the NFC Award, but with the failure to reform the revenue system, the dysfunctional state of the FBR and inefficient provincial tax agencies, tax concessions and exemptions for the wealthy tax evaders, and granting amnesties to those state thieves, who have mercilessly looted the wealth of the nation with impunity.

The four provinces are least interested in taxing the rich and mighty. In Sindh, for example, major tax collection is from sales tax on services, which is regressive in nature, but the provincial government hesitates to collect agricultural income tax from the big pirs owing lands. The same pattern is in Punjab and Khyber Pakhtunkhwa, where the assemblies are dominated by absentee landowners. The failure to collect income tax on agricultural income as per the Constitution has led to significant revenue losses. Balochistan faces an even worse situation, with no income tax collected on agricultural income exceeding five million rupees during any financial year. There is a clear lack of political inclination in all provinces to impose agricultural income tax as per the Constitution, a right they have been enjoying since independence and has nothing to do with the Eighteenth Amendment.

The federal budget never shows any figure of agricultural income tax in ICT because, though according to the Constitution, the National Assembly has the exclusive power to impose this tax, but it has never exercised this right. None of our prime ministers or finance ministers has ever mentioned its implementation to increase federal resources. 

The World Bank and IMF have not mentioned this lapse in any of their reports or studies. Even the latest IMF’s Press release No. 24/273, July 12, 2024 is silent on this issue. A viable solution to proper taxation of “agricultural income” is transferring it to the federal government and restoring to the provinces their pre-independence right of sales tax on goods, brazenly snatched by the first military dictator, as well as implementation of a federalized structure of tax administration for effective enforcement of tax codes.

The writer, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE)