Unconstitutional “agricultural income” taxation

Huzaima Bukhari & Dr. Ikramul Haq

“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 

Taxing “agricultural income” is the sole prerogative of provincial governments under the Constitution of Islamic Republic of Pakistan [“the Constitution’]. All the four provinces have laws for imposition of agricultural income tax (AIT). The share of agricultural income tax (AIT) in total tax revenue of country of Rs. 4.75 trillion in fiscal year 2019-20 (11.4% of GDP) was only (0.06 % of GDP). Share of agriculture in GDP of Rs. 44.7 trillion was around 19%. According to Economic Survey of Pakistan 2019-20): “…the performance of Agriculture during 2019-20 remained remarkable. On the aggregate, the sector recorded strong growth of 2.67 percent considerably higher than 0.58 percent growth achieved last year”. The abysmally low collection of AIT vis-à-vis share in GDP proves beyond any doubt lack of political will to tax the rich, absentee landlords.

The Tax Expenditure Report 2020 of Federal Board of Revenue (FBR) claims that in tax year 2018 exempt dividend paid by corporate sector from AIT was Rs. 43 billion. The provincial collection of AIT in tax 2018 was Rs. 1598 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”. Farms smaller than 7.5 acres were excluded and Rs. 50,000 income per acre basis was assumed.

According to an op-ed of February 6, 2020 by a former federal secretary: “This 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…”.

Entry 47, Part 1 of Federal Legislative List provided in the Fourth Schedule to the Constitution empowers the federal government to levy “taxes on income other than agricultural income“. The expression “agricultural income” is defined in Article 260(1) of the Constitution, which says: “Agricultural income” means agricultural income as defined for the purpose of the law relating to income tax.”

It is pertinent to note that the above definition cannot be altered even by the Parliament without the prior sanction of President of Pakistan as provided in Article 162 of the Constitution: “No Bill or amendment which imposes or varies a tax or duty the whole or part of the net proceeds whereof is assigned to any Province, or which varies the meaning of the expression “agricultural income” as defined for the purposes of the enactments relating to income-tax, or which affects the principles on which under any of the foregoing provisions of this Chapter, moneys are or may be distributable to Provinces, shall be introduced or moved in the National Assembly except with the previous sanction of the President.”

[emphases are supplied]

Both the federation and provinces under the Constitution are bound to follow the definition of “agricultural income” as provided in the income tax law while determining their legislative powers in terms of Article 70(4), Article 141 and Article 142 read with Forth Schedule to the Constitution. Even a cursory look at laws (and amendments therein) from time to time promulgated by them to tax agricultural income shows that:

• Khyber Pakhtunkhwa even till today has not replaced the “North-West Frontier Province Land Tax and Agricultural Income Tax Ordinance, 2000”, issued by a military dictator. The AIT levied under the Second Schedule, inserted in 2014, is inoperative for want of implementation. The bulk collection remains on per acre basis [in 2018 it was Rs. 100 million as per FBR]. This is blatant violation of the Constitution. PTI has been ruling this province since 2013 but there is no political will to impose AIT as per command of the Constitution. The PTI stalwarts keep on making tall claims of respecting the Constitution but in reality hoodwinking the poor people by not collecting due tax from rich landowners. Their law is still in the name of redundant “NWFP”.
• The same is the case with Sindh, where the “Sindh Agricultural Income lax Ordinance, 2000 exists. Every year Pakistan Peoples Party on the eve of death anniversary of Zulfikar Ali Bhutto [it will be 42nd on April 4, 2021] makes ritual pledges to follow his legacy but when matter comes to taxing the rich-peer-cum-feudal-lords they follow a man accused by them as murderer of Benazir Bhutto. In 2018, AIT collection was Rs. 559 million.  
• The Punjab Agricultural Income Tax of 1997 yielded Rs. 913 million in 2018. No effort has been made till today to collect AIT under section 3B inserted vide Finance Act, 2013: Notwithstanding the provisions of section 3, where any person has declared agricultural income for any assessment year in the return filed under the Income Tax Ordinance, 2001 (XLIX of 2001), the person shall pay the tax on such income at the rate specified in the Second Schedule”.
• The Balochistan Tax on Land and Agricultural Income Ordinance, 2000 has no provision to quantify AIT and collection in 2018 was only Rs. 17 million. 
• The National Assembly enjoys exclusive power to levy AIT in Islamabad Capital Territory (ICT) under Article 142(d) of the Constitution but it still has per acre tax under Tax on Agricultural Land Ordinance, 1996. The rates are ridiculous: on land exceeding five acres if used for fruit orchard or for growing vegetable/flowers (Rs. 300 per acre). For irrigated land, exceeding five acres (Rs. 50 per acre) and for unirrigated (Rs. 25 per acre). Adding  insult to the injury, the same National Assembly inserted the following proviso to section 111(1) of  the Income Tax Ordinance, 2001:

 “Provided that where a taxpayer explains the nature and source of the amount credited or the investment made, money or valuable article owned or funds from which the expenditure was made, by way of agricultural income, such explanation shall be accepted to the extent of agricultural income worked back on the basis of agricultural income tax paid under the relevant provincial law”.

[Emphases supplied]

The National Assembly has failed to realise that a person earning agricultural income is bound to declare it in his wealth reconciliation statement. The addition cannot be made by working back “on the basis of agricultural income tax paid under the relevant provincial law as none of the provinces is collecting AIT on the said basis. A taxpayer can only be penalised if he fails to prove quantum of agricultural income declared as exempt in the income tax return. The National Assembly itself did not bother to tax the rich landowners within ICT—Finance Act 2020 and the FBR, TNS, The News, July 5, 2020] but has made FBR self-claimed collector on AIT without knowing that Punjab under Khadim-e-Aala (sic) suspended section 3B by an executive order, Letter No.201/2016/166-RC of 17.10.2016 as under:

“During a meeting of the Committee constituted by the Government to deliberate upon the issues of agricultural farmers held on 15.10.2016 under the Chairmanship of Minister for Law & Parliamentary Affairs, it was decided that the income based assessment of collection Agricultural Income Tax under Second Schedule of the Punjab Agricultural Income Tax Act, 1997 should be withheld till further orders. However, the land based assessment and collection of Agricultural Income Tax under the 1^st Schedule of the Act ibid should be continued.”

Admittedly, barring a few cases, all provinces have been collecting land tax and not AIT, thus, application of proviso to section 111(1) is unconstitutional. The National Assembly and even the Supreme Court in 2019 SCMR 446 ignored it. The FBR and Punjab Board of Revenue issued unlawful notices for recovery under suspended section 3B of Punjab Agricultural Income Tax of 1997. While, none of the four provinces is collecting AIT as per Article 260 of the Constitution, the National Assembly till today has not levied it in ICT. It shows violation of the Constitution and appeasing the rich landowners. The federal and provincial legislators must take note of these blatant violations and take remedial measures in the forthcoming national and provincial budgets.

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The writers, authors of many books and tax advisers, are Adjunct Faculty at Lahore University of Management Sciences (LUMS).