Sacred cows and the IMF support

By Nasir Jamal

THE prime minister’s advisor on finance Shaukat Tareen has pledged to tax the income on agriculture in addition to other hitherto untaxed sectors of the economy.

“There will be no sacred cows,” the former Citibanker told a news conference in Washington on Oct 14 after attending the annual meetings of the World Bank and the International Monetary Fund (IMF), days after taking up his new job.

“No sacred cows; real estate, agriculture, all will be taxed,” he told a questioner who appeared to doubt his claim.

The advisor’s statement is widely seen as part of Islamabad’s attempt to seek the IMF’s endorsement for its economic stabilisation policies — and possibly securing hard cash from the fund itself –, which is crucial to make both bilateral and multilateral lenders open up their coffers to help Pakistan overcome its ever worsening balance of payments crisis and avert a possible default on its foreign debt obligations. The government says it needs $3-$5 billion in next 30 days to stabilise the sliding foreign exchange reserves.

Both the IMF endorsement of Islamabad’s economic policies (or it its funding) is unlikely to come unless the government, among other things, outlined a credible plan to improve the tax- to-GDP (gross domestic product) ratio to 15 per cent over a specified period of time, tax all sectors of the economy and eliminate all tax exemptions.

The government is already in the process of implementing certain other conditions that the fund imposes on its borrowers — elimination of subsidies on oil and power and curtailing its expenditure to control fiscal deficit.

“The statement was made by Mr Tareen to simply please the IMF which encourages its borrowers to cut expenditure and raise and expand taxes. The agriculture sector is already being taxed by the provinces, and I cannot imagine the advisor being unaware of this fact,” AgriForum Pakistan chairman Ibrahim Mughal told Dawn last week.

But officials in the finance ministry in Islamabad reject this notion.

“True, the fund has in the past encouraged successive governments to levy tax on farm income without much success,” an official, who did not want to give his name because of controversy on the subject.

“But there has been a growing feeling in the recent years among the policy makers and tax collectors that the country cannot increase its tax–to-GDP ratio — currently stagnating at 10.5 per cent. If we need to raise this ratio we would have to levy taxes on the untaxed sectors and remove exemptions. The increased income of farmers on the back of rising global food and commodity prices in the last couple of months has strengthened this feeling,” he said.

Pakistan has a history of taxing agriculture through the land revenue system, and it has introduced under pressure from the multilateral lenders variants of agricultural income tax in the past.

Yet its collection has always remained negligible, far below its actual potential. For example, total agriculture tax collection during the last fiscal was below Rs1 billion with Sindh contributing Rs200 million and Punjab Rs700 million.

It may be recalled that the Federal Board of Revenue (FBR) had tried hard during early 2007 to convince the previous government to legislate to make tax on farm income a federal subject or let the board collect it on behalf the provinces to substantially increase the collection.

The FBR thought the tax had the potential to generate what it said huge, estimated revenue to the tune of over Rs60 billion a year. That amount could gradually increase as agriculture sector contributes above 21 per cent to the nation’s GDP, the board officials maintained at a briefing on the issue at the presidency in February last year.

But the strong agriculture lobby, which has always formed a big part of almost all governments, was blamed to have thwarted the board plans to effectively tax their income.

A Punjab finance ministry official, who also requested anonymity, said the effective imposition of farm tax in the income mode instead of land mode was essential to enhance provincial own tax revenue. But, he said, it was a misnomer that the provinces would let the federal government take this tax away.

“We want full control over our resources and have asked the federal government to transfer collection of sales tax on services. How can we give one more tax to Islamabad to collect on our behalf? Instead of trying to take any tax away from our control, the federal government should help the provinces build capacity to collect taxes,” he said. He said the provinces, especially Punjab, was restructuring the tax system under its tax reforms programme to boost income from this levy.

The issue of agricultural income tax has always generated controversy with the manufacturers relentlessly demanding tax on agriculture income to reduce the burden of indirect taxes on the industrial sector.

According to an official of the ministry of food, agriculture, and livestock, only two of the nine commissions constituted up to 1999 to study the issue of taxing agriculture favoured its imposition.

“If we want an equitable, fair tax regime, everyone should pay tax on his or her income no matter he is an industrialist or a farmer,” argued Pakistan Hosiery Manufactures Association chairman Shahzad Azam Khan. “Nobody or no sector of the economy should be exempted from tax.”

It is generally believed that the big land holders in Punjab and Sindh do not want to pay taxes on their incomes. “They have huge palatial houses in all the cities and drive latest, expensive cars and jeeps. But they don’t pay taxes,” a former president of the Lahore Chamber of Commerce & Industry Pervez Hanif said.

Some farmers, however, say they don’t mind the government taxing their income.

“But the government should tax our income rather than impose presumptive tax on land,” a progressive farmer from Bahawalpur and a former head of the Small & Medium Enterprise Development Authority (Smeda) Iqbal Mustafa said.

He said more than 90 per cent farmers were either landless tenants or small land golfers. “So when we talk of agriculture income tax we’re actually talking of taxing the bigger land holders whose number shouldn’t be more than 4,000 to 5,000 in the country. So you can imagine what difference would the imposition of the tax on agriculture income make on our total tax revenue collection,” he insisted.

There are also people who don’t want the government to tax agriculture income at present because it could hamper the recent efforts to encourage growth in the food and other crops by fiscal incentives.

“There is every reason to tax all kinds of income to end discriminations in the economy,” says an official from the Punjab agriculture department. “But taxing farm income now would prove harmful for agriculture sector and the objectives of reducing rural poverty and providing stimulus to overall economic growth.”

It remains to be seen how the government actually goes ahead with its plan to effectively tax agriculture income without affecting the expected growth in the sector.

Source: Daily Dawn, 27/10/2008

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