Understanding the complexity & repercussions of agricultural income tax in Pakistan
By: Communicators – Business Team (July 23, 2024)
Agricultural income taxation (AIT) in Pakistan is quite complex and repercussions of its distinct features and challenges are faced by everyone. Here are some details:
- Jurisdiction and Tax Rates:
- Agricultural income tax is collected by provincial governments.
- The maximum AIT rate is 15% in Punjab and Sindh, lower than rates for salary and business income.
- Revenue Collection and GDP Contribution:
- Total AIT revenue is less than Rs4 billion, which is less than 0.01% of the national GDP.
- The agriculture sector contributes 24% to GDP, amounting to Rs22 trillion.
- The crop subsector contributes only 8.54% to GDP, while the rest of the agricultural subsectors contribute 15.46%.
- Tax Collection Methods:
- In Punjab and Sindh, AIT is both land-based and income-based, with farmers paying the higher of the two.
- Large farmers often declare their income for AIT but may underreport to reduce tax liabilities.
- Small and medium farmers typically pay a fixed land-based AIT, a nominal amount per acre.
- Challenges and Issues:
- The division of land among family members over generations leads to smaller farms, which may fall below the AIT threshold.
- Farmers face implicit taxes due to government policies like export bans and price controls.
- Assessing agricultural income is challenging due to yield variations and price fluctuations.
- Small and medium farmers lack the capacity to maintain proper accounting books.
- Policy Recommendations:
- Align AIT rates for large landlords with federal business income rates.
- Consider the plight of small and medium farmers when designing the new AIT regime.
- Use presumptive taxation based on land productivity for small and medium farmers.
- Tax farmers with over 50 acres of irrigated land similarly to business income, adhering to progressive taxation principles.
The passage underscores the complexity of AIT and the need for a balanced approach that considers the diverse nature of the agricultural sector and the socio-economic realities of farmers.