Untaxed no more

Along with the bureaucracy, large wholesalers, retailers and textile exporters, agriculture has historically been one of the big sacred cows in Pakistan’s economic landscape. Successive governments have been loath to tax at appropriate levels or reform the sector for fear of incurring the political wrath of those who benefit from it. Agriculture accounts for around a quarter of the country’s GDP and almost 40 per cent of the country’s labour force. While the sector’s size and importance only underscores the imperative for proper taxes and reforms, it is also likely why politicians have often been reluctant to do so. Any missteps could prove to be catastrophic while even good policy has the potential to upset the many who benefit from the current system. As such, the sector only accounts for 0.1 per cent of total taxes nationwide. But things are changing. Legislation concerning the Agriculture Income Tax (AIT) has now been approved by two provincial assemblies (Punjab and Khyber Pakhtunkhwa) and progress is underway in Sindh and Balochistan too. The move to finally tax agriculture comes amidst increased pressure from the IMF to consolidate and raise revenue collection and while the exact rates for the different provinces are yet to be confirmed, a report by the German political foundation Friedrich Ebert Stiftung released last November estimates that Pakistan can generate up to Rs65 billion through AIT.

If these projections are indeed true, the various provincial AITs cannot be implemented soon enough. This is revenue the country desperately needs. It is also encouraging to see the provinces taking the lead in the implementation of these taxes, which ought to be the case in most major economic initiatives, allowing them to be debated, formed and implemented closer to the people they are going to impact. The major concerns going forward will be about the efficacy of tax collection, who exactly will carry the burden of the new taxes and if the money that is collected will be spent where it should be. Pakistan’s renewed taxation efforts, coming in the wake of last summer’s IMF deal, have thus far struggled to hit the mark. According to the Federal Board of Revenue (FBR), it collected Rs5.62 trillion in the first half of the current fiscal year (July-December), falling short of its Rs6.01 trillion target by Rs386 billion. This is after a lot of stick-waving about the restrictions that would be placed on non-filers or those who refused to pay tax, including the much-prized ability to travel abroad. It is hoped that the AIT will be different.

It must also be noted that, even with the shortfall, those who have thus far felt the pinch from the taxes the most are, as usual, the salaried classes. If the AIT is simply passed on to these same people via higher food prices then the initiative will have been for naught. Genuine efforts must be made to ensure that the high earners in the sector actually pay their fair share. And as for how this money should be spent, it must be noted that our agricultural sector is currently among the most inefficient in the world. A small number of large landowners tend to reap most of the rewards by undercutting and exploiting poor farmers. It is hoped that the money collected through the AIT will be used to help the latter. It should also be used to boost the sector’s efficiency, as it is also among the most wasteful in the country. For example, agriculture uses a huge 95 per cent of the country’s freshwater resources but it is estimated that almost 60 per cent of this water is wasted. Infrastructure upgrades and greater technological integration are clearly needed. As is the case with all taxes, passing them is only where the real work begins.