Taxing agricultural income

Huzaima Bukhari & Dr. Ikramul Haq

Pakistan People’s Party (PPP) on the eve of the 32nd death anniversary of Zulfikar Ali Bhutto on 4 April 2011 made pledges to follow his legacy. This of-repeated rhetoric needs to be actually reflected in action, which in the case of the present leadership, speak otherwise. For example, on 15 March 2011, the government levied taxes on agricultural inputs burdening the poor farmer even more rather than imposing personal income tax on feudal lords. Those at the helm of affairs of PPP these days are not even aware of the historic decision taken by Zulfikar Ali Bhutto of taxing “agricultural income” through Finance (Supplementary) Act 1977. The law, passed by Federal Parliament and approved by President on January 8, 1977, was thwarted by the dictator, General Ziaul Haq, who overthrew a legitimate government on 5 July 1977. Zia not only used judiciary to hang Bhutto but also forced this country back into dark ages. He and his successor, General Musharraf, ably protected the feudal lords (including mighty generals-turned-landlords receiving lands as gallantry awards or otherwise!).

It is a pity that majority in the feudal community does not pay a single penny as income tax on their agricultural income. Successive governments after Zulfikar Ali Bhutto—military and civilian alike—did not deem it necessary to remove oppressive taxes levied on small farmers by our colonial masters. They have faithfully protected the colonial heritage and even Benazir during her two terms in office did not bother to implement any revolutionary measure of taxing “agricultural income” as was done by her illustrious father in 1977. This shows the departure in ideological mind-set of PPP over time, especially after the party was hijacked by Asif Ali Zardari and his cronies.

The feudal class sitting in the Punjab Assembly is not at all interested in collecting agricultural income tax. Khadim-e-Aala (self-assumed title by Chief Minister, Shahbaz Sharif) is least pushed about implementing the existing Agricultural Income Tax law in his province, openly displaying hypocrisy as a ruler. He and his elder brother relentlessly criticize the federal government for levying regressive taxes, but make no effort to tax the rich and mighty by reintroducing estate duty [now a provincial subject after 18th Constitutional Amendment] and capital gain tax—progressive taxes abolished by their political mentor General Ziaul Haq.

The Punjab Assembly on 31 March 2011 passed a resolution asking the federal government to review its decision of imposing 17% tax on agricultural inputs through a Presidential Ordinance. Would the Punjab Assembly, dominated by feudal MPAs inform its voters, why many of its honourable members (sic) are not paying agricultural income tax? Under the Punjab Agricultural Income Tax of 1997, as amended from time to time, no effort was made until 2000 to impose income tax on total income earned from this source. A face-saving device was introduced to levy yet another tax on acreage basis at different rates in respect of irrigated and non-irrigated lands. Khadim-e-Aala has never bothered to tax the rich absentee landlords of his province—many of whom dominate PML(N). His government could have surplus of billions of rupees, had the law to tax the Khosas, Gilanis, Quershis, Tiwanas, Sardars, Chaudharis, Maliks—just to mention a few—been implemented.

Imposition of 17% sales tax on agricultural inputs would have disastrous impact as the overall contribution of agriculture sector in GDP growth may decline by 2%-3%. Certainly, the growers would suffer Rs. 70-80 billion losses as a consequence of this levy. The decision was taken without considering its negative effects on the overall agricultural productivity of Pakistan. The poor growers would have to pay heavily for agricultural inputs, for e.g. fertilisers, pesticides, tractors etc. after the exorbitant levy of 17% sales tax on these items.

The Chairman of Agri-Forum Pakistan in a Press interview claimed that the decision would not only be detrimental for the agricultural sector but could lead to more poverty in rural areas, where majority is undernourished or starving in the wake of devastating floods. About 80,000 tractors are purchased by the growers annually and after imposition of sales tax, they would have to pay Rs. 8 billion more. Rs. 300 billion are required each year to purchase fertilisers and now the growers would need additional Rs. 50-55 billion. For pesticides, an additional amount of Rs. 7-8 billion would be spent. Contribution of the agriculture sector to GDP growth is 24%, which may decline to 19-20% after this tax. With extra burden of Rs. 70-80 billion on the agriculture sector, the total number of people living below the poverty line is expected to increase from 80 million to 110 million.

In the aftermath of imposition of 17% sales tax on agricultural inputs, there was sharp surge in the price of flour from Rs. 32 per kg to Rs. 40/kg, rice from Rs. 95/kg to Rs. 150/kg, eggs from Rs. 62 per dozen to Rs. 100 per dozen, goat meat from Rs. 500/kg to Rs 600kg, beef from Rs. 250/kg to Rs. 300 per kg, chicken from Rs. 240 per kg to Rs. 300/kg. Undoubtedly, there would be multiple negative impacts on the fragile economy of Pakistan with an overall decline in agricultural productivity that would lead to an increase in unemployment—at least 5 million tenants may be unemployed in the long run. This bleak scenario is certainly is not the legacy of Zulfikar Ali Bhutto.

Both the Federation and Provinces are not interested to levy proper income tax on the big absentee landlords. Feudal class dominating politics in Punjab—representing all political parties—would never go for agricultural income tax. The PPP government in Sindh is keen to collect sales tax on services (which it should as its Constitutional right) but has no desire to tax the filthy rich pirs and waderas. Would this nation be informed as to how much tax is paid by the Chief Minister Qaim Ali Shah, Makhdoom Amin Fahim and many other feudal-cum-pirs of Sindh on their agricultural income? Even our worthy Finance Minister having lands in Sindh is not paying any tax. The same is true for our Prime Minister. How ironic that they profess allegiance with ZAB the iconoclast of the infamous 22 families of Pakistan!

The main cause of the prevailing pathetic socio-politico-economic situation is control of State by the feudal class and its cronies. They protect and promote inefficient, corrupt, repressive, insensitive and outrageous bureaucratic structures—remnants of the colonial legacy. Vested interests in establishment—civil-military complex—and parliament are not ready to change these structures as this would disinvest them of essential tools to exploit and control the masses.

If we want to make Pakistan an egalitarian society, we need to strive for empowering the masses and the government, not just a few handful. This requires surrendering power to levy and collect taxes at local levels.  Decisions would then be taken by the residents—through elected council members—and not bureaucrats sitting in Islamabad or provincial capitals in palatial offices oblivious of the ground realities, working most of the time for self-aggrandizement rather than for the betterment of the nation as a whole. The elected members would be directly answerable to the residents. Local courts should be set up where justice is provided at the people’s doorsteps rather than requiring them to go through expensive and long-drawn litigations under the conventional system. We need to move quickly and decisively—go for massive reforms in all spheres. If PPP is sincere to Zulfikar Ali Bhutto’s legacy, it should imitate the processes he established instead of scarring his image as a great benefactor of the people.

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