Hillary Clinton’s recent comments on the tax policies of Pakistan were not received very well in the country. Some sections of society viewed it as an attack on the country’s sovereignty. The reaction to the statement is quite understandable, keeping in view Uncle Sam’s public image
It is no secret that feudal lords and wealthy landowners, who literally enjoy a controlling share of the country’s resources and the political system, are the poorest when it comes to paying taxes. The agriculture sector contributes around 22 percent to the country’s GDP; however, its share in the total tax collection is negligible. Agriculture policies seem to be one of the few issues upon which all the military and political rulers agree. This alliance was quite evident in the case of land reforms. The issue was finally decided by a Supreme Court Shariat Appellate Bench in 1989, declaring land reforms un-Islamic. Land reforms are widely debated in the country even today. However, the focus of this article is on the issue of agricultural income tax.
The fact that legislation for agricultural income tax exists might come as a surprise for most readers. The usual discussions on the topic revolve around demands from the economists and social workers to bring the feudal landlords into the tax net.
Agriculture tax was made a provincial subject under the 1973 constitution. The lack of political will on the issue is evident from the fact that no legislation was ever carried out by any of the four provinces until 1993, when the NWFP Agricultural Income Tax Ordinance was promulgated. Ironically, the said ordinance did not even provide the definition of agricultural income. The other three provinces also subsequently passed similar laws. In Punjab, agricultural income tax was levied in 1997 through the Punjab Agricultural Income Tax Act.
Though agricultural income tax is the sole prerogative of the provinces under the constitution, all of the four provinces lack the political will and the machinery to collect it. Total federal tax collection for the year 2009 was around Rs 1,380 billion. During the year, Punjab collected around one billion rupees through agricultural income tax and the amount collected by Sindh was around Rs 200 million (Sindh’s share in the country’s agriculture can be estimated at around 20-25 percent). A mere Rs 1.8 billion were collected by all the four provinces combined. In 2008, Punjab collected only Rs 0.7 billion and around Rs 0.71 billion was collected in 2007. The pattern for previous years is also quite similar.
The sector possesses a minimum revenue potential of around Rs 250-300 billion, considering the current GDP to tax ratio and the tax rate. Considerable ‘benevolence’ for the sector has already been shown by the lawmakers while setting the tax rate. According to the legislation carried out by provinces on income exceeding Rs 300,000, an amount of Rs 22,500 plus 15 percent of the amount exceeding Rs 300,000 is to be paid as tax. For income of Rs 200,000 to Rs 300,000, the fixed amount is to be Rs 12,500 and 10 percent of the amount exceeding Rs 200, 000. It should be noted that these rates were set by the governments at a time when corporate taxes were as high as 50 percent. Even today, these are considerably lower than the corporate tax level of around 35 percent.
The government’s patronisation of the sector has actually kept it from standing firm on its own and has given way to further inefficiencies. It should be stressed that already more than 65 percent of the country’s population is involved in the agriculture sector. That is one of the highest in the world. In the US, around three percent and in the UK around one percent of the population is involved in the agriculture sector. In Brazil, around 20 percent are employed in the agriculture sector. The figure that was 62 percent in 1950s has come to the present level with the development of its economy. How to productively utilise the workforce freed as a result of mechanisation and improvement in agricultural practices is a topic that requires detailed discussion but these statistics do highlight the inherent inefficiencies of the sector.
It is not by coincidence that most developed countries around the globe enjoy a very high tax to GDP ratio compared to the developing ones. Countries like Belgium and Austria enjoy a tax to GDP ratio of as high as 45 percent. The logic is quite simple: in order to finance their hefty budgets, they need a solid revenue stream. If governments fail to match their revenues to expenditures, alternative avenues like debt financing, money supply manipulation, etc, might be used.
Hillary Clinton’s recent comments on the tax policies of Pakistan were not received very well in the country. Some sections of society viewed it as an attack on the country’s sovereignty. The reaction to the statement is quite understandable, keeping in view Uncle Sam’s public image. However, it does not alter the fact that Pakistan enjoys a tax to GDP ratio of around 9.6 percent, which is one of the lowest in the world. The elite of the country indeed contribute very little to the government’s revenue stream. The reasons that enable them to escape the tax net range from political shrewdness to a corrupt system.
As a result, Pakistan’s government, like many other developing nations, has to frequently look toward international agencies and countries like the US to finance its fiscal gap. The spiral of foreign debt repayment through further borrowing has resulted in the country’s foreign debt soaring to an alarming level of $ 55.6 billion.
The provincial governments that are already facing a dire financial crunch need to forcefully implement the law that has been shelved for so many years. Though the current agricultural income tax rate is very minimal, still its implementation can provide the provinces, especially Sindh and Punjab, with much-needed revenues. Moreover, it can ease the financial burden on the federal government as well.
Currently, the agriculture income tax is collected through provincial revenue departments. The established procedures provide local patwaris the opportunity to tailor the tax returns according to the wishes of the wealthy landowners. It is quite evident that the provinces lack the ability and machinery to collect such taxes and long-term investments might be needed in the infrastructure. However, the collection can be outsourced to federal board of revenue at a fixed percentage or amount. The dream of self-sufficiency cannot be realised without fully utilising the potential of our economy.
The writer is a graduate of Institute of Business Administration, Karachi. He can be reached at firstname.lastname@example.org