Huzaima Bukhari & Dr. Ikramul Haq
Taxation of “agricultural income” is the sole prerogative of provincial governments under the 1973 Constitution of Pakistan (“the Constitution”). The laws (sic) enacted by all the four provinces for taxing this income are unconstitutional, framed in utter violation of supreme law of land. At the same time, the total collection by all the four provinces is dismally low—in 2009 just Rs. 1.89 billion were collected against the actual potential of Rs. 200 billion; share of agriculture in GDP that year was about 22%. The abysmal collection proves beyond any doubt lack of political will to tax the rich absentee landlords in Pakistan—their number is meager but clout in politics is very strong. This influential class includes the generals and other high-ranking military officers, who now own substantial state land, given to them as awards! They have emerged as a new landed aristocracy with gun power—this phenomenon remains unexplored by political analysts, economists, civil society and media. Like barons of feudal Europe, they control our politico-economic system—they have no respect for constitutional rule. The exploitation of landless tillers and industrial workers—the most of the industry is also now owned by feudals-in-Parliaments—is the real issue that has never been addressed by any political party.
Presently, the provincial governments are not levying and collecting tax on “agricultural income” but charging a fixed tax on per acre basis. The charge is usually Rs.150 per acre from the irrigated areas and Rs.100 per acre from non-irrigated lands. This acreage-based charge is gross violation of Constitution that stipulates tax on “agricultural income” as defined in Article 260(1).
Entry 47, Part 1 of Federal Legislative List contained in the Fourth Schedule to the Constitution (it remains intact even under the proposed 18th amendment), empowers the federal government to levy “Taxes on income other than agriculture 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.”
The word “means” signifies that this is an exhaustive definition that binds all the provincial legislatures to levy tax on “agricultural income” as defined in the Income Tax Ordinance, 2001[it repealed the Income Tax Ordinance 1979 with effect from 1st July 2002]. The definition of “agricultural income” as contained in section 41(2) of the Income Tax Ordinance, 2001 has to be adopted by all the provinces. This definition (exactly the same as in section 2(1) of the repealed Income Tax Ordinance, 1979) reads as under:
“(2) In this section, “agricultural income” means-
(a) any rent or revenue derived from land which is situated in Pakistan and is used for agricultural purposes;
(b) any income derived from such land by-
(ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market; or
(iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in paragraph (ii); or
(c) any income derived from-
(i) any building owned and occupied by the receiver of the rent or revenue of any such land described in clause (a) or (b);
(ii) any building occupied by the cultivator, or the receiver of rent-in-kind, of any land with respect to which, or the produce of which, any operation mentioned in sub-clause (ii) and (iii) of sub-clause (b) is carried on but only where the building is on, or in the immediate vicinity of, the land, and is a building which the receiver of the rent or revenue or the cultivator, or the receiver of the rent-in-kind by reason of his connection with the land, requires as a dwelling-house, or as a store-house, or other out-building.”
The above definition cannot be amended even by the Federal Parliament without the prior sanction of President of Pakistan as provided in Article 162 of the Constitution which says:
162. Prior sanction of President required to Bills affecting taxation in which Provinces are interested: – 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.”
Since the issue was that of distribution of legislative powers between Federation and Provinces, the framers of Constitution took extraordinary care in defining the expression “agricultural income” and by imposing an embargo on Federation not to introduce any Bill aimed at varying the meaning of the expression “agricultural income” except with the previous sanction of President of Pakistan. He being the head of State can block any legislation that affects the “net proceeds” [for definition see Article 260] under Article 160 disfavuoring any particular province of favouring another one.
The historical record shows that the above Constitutional command was violated even by the farmers of the Constitution. By the Finance (Supplementary) Act, 1977, the definition of agricultural income as obtaining in section 2(1) of Income Tax Act, 1922 was amended by the words: “and is either assessed to land revenue in Pakistan or subject to a local rate assessed and collected by the officers of the Government as such” were deleted. The aim of this exercise was to broaden the scope of agricultural income with a view to subjecting it to tax for which a schedule was also enacted.
In the repealed Income Tax Ordinance, 1979 that succeeded Income Tax Act, 1922 exemption of agricultural income from income tax was restored. However, the definition of agricultural income (as amended in 1977) still continued. The result, therefore, was that the definition of agricultural income remained as wide and all-encompassing as it was intended by the Finance (Supplementary) Act, 1977 for obvious reasons. Since presently there is no desire to tax income from agriculture through Federal legislation, the definition as it exists in its wider scope, may exempt such other income as may not be, strictly speaking ‘agricultural’. The general principle of taxation is to ‘restrict the definition’ if any exemption thereunder is allowed and to ‘broaden the definition’ if the charge thereon is intended.
Nobody has given any thought to this gross violation. First at the time of altering the meaning of expression “agricultural income” through the Finance Act, 1977, no previous sanction of the President was sought. A gross violation of Article 162 was committed by the authors of the 1973 Constitution themselves. It is tragic that on July 5, 1977, the government of Zulifkar Ali Bhutto was overthrown by a military dictator. The historic decision of taxing “agricultural income”, as passed by Federal Parliament in the shape of Finance Act, 1977, was thwarted by the military regime of General Ziaul Haq. Zia’s legacy continued for 11 years and that of General Musharraf for 8 year. But the feudal lords (including mighty generals-turned-landlords who received gallantry awards or otherwise!) did not pay a single penny as income tax. It is, however, true that other oppressive taxes levied on small farmers on agricultural lands by colonial masters remained in force. So we faithfully protected our colonial heritage but refused to implement a revolutionary measure of taxing “agricultural income” in 1977 taken by Zulfikar Ali Bhutto in 1977.
It is strange that pre-1977 definition of “agricultural income” was not restored in 1979, when Gen. Ziaul Haq himself promulgated the Income Tax Ordinance, 1979 on June 28, 1979 “in pursuance of the Proclamation of the fifth day of July 1977 read with the Laws (Continuance in Force) Order 1977 (CMLA Order No. 1 of 1977)”. General Musharraf also did not bother to do the same when he replaced Income Tax Ordinance, 1979 with Income Tax Ordinance 2001, promulgated on September 13, 2001 ‘in pursuance of the Proclamation of Emergency of the fourteenth day of October, 1999, and the Provisional Constitution Order 1 of 1999, read with Provisional Constitutional Amendment Order No. 9 of 1999”. This vital aspect has even escaped the attention of Raza Rabbani Committee while preparing the 18th Constitutional amendment. Resultantly, violation committed in 1977 is still persisting!
The arbitrary—in fact unlawful—change in the definition of “agricultural income” in 1977 without the previous sanction of President as required under Article 162, may have been protected under Article 75(4), but the spirit of the Constitution requires that the Federation should not alter or amend the definition of “agricultural income” and provinces, while levying tax on this item should conform to constitutional requirements.
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 the Fourth Schedule to the Constitution. However, it is a matter of great concern that the Federation violated the commands of Constitution as narrated above, in respect of tax on “agricultural income”. The same is true for the Provincial Legislatures. Even a cursory look at laws (and amendments therein from time to time) promulgated by them to tax “agricultural income” shows that:-
(a) The North West Frontier Province [now proposed to be Khyber Pakhtunkhaw] did not even provide the definition of “agricultural income” in its Northwest Frontier Province Agricultural Income Tax Ordinance, 1993! The tax levied under the name of “Income Tax” was, in fact, a land tax on the basis of produce index units. This was nothing but a mockery of legislative process. If there was no political will to impose INCOME TAX on “agricultural income”, then what was the need to hoodwink the people by calling it Agricultural Income Tax? Since 1993 no government of the province has bothered to correct this anomaly. This shows the level of understanding of Constitutional provisions by our legislators (sic).
(b) The same was the case with Sindh Agricultural Income Tax Act of 1994 as amended from time to time. The PPPP government is keen to collect VAT or 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 Chief Minister Qaim Ali Shah, Makhdoom Amin Fahim and many other feudal-cum-pirs of Sindh on their agricultural income?
(c) The Punjab Agricultural Income Tax of 1997, as amended from time to time, was no exception. No effort was made till 2000 to impose income tax on total income earned from this source. A face-saving device was introduced to levy yet another tax on acre basis at different rates in respect of irrigated and non-irrigated lands. Khadim-e-Aala (self-assumed title by Chief Minister, Shahbaz Sharif) has never bothered to tax rich absentee landlords of his province—many of whom dominate PML(N). He could have surplus of billions of rupees, had proper legislation been made as per Constitution to tax the Khosas, Gilanis, Quershi, Tiwanas, Sardars, Chaudharis, Maliks—just to mention a few. Such taxation could have provided room to initiate a number of meaningful welfare, job-oriented schemes, unlike the gimmick of 2-rupee roti that is not restricted to the needy alone, for the have-nots. But certainly, even the Sharifs have no intention to tax the rich and mighty feudals—they themselves have joined the class by grabbing many lucrative lands—see palatial palaces in Jati Umra, London and elsewhere.
(d) In Baluchistan, the position was not different at all till 2000. From 1993 to 1999, the Governor of Baluchistan promulgated various Agricultural Income Tax Ordinances that were amended from time to time, following the same pattern as in the other three provinces.
The above analysis shows that none of the four provinces, while levying income tax on “agricultural income” followed Article 260(1) of the Constitution. All the agricultural income tax laws passed by them were merely superficial, whereas in substance no income tax on “agricultural income” was imposed by any province, showing an attitude of contempt and apathy towards constitutional provisions.
In Baluchistan, “The Baluchistan Tax on Land and Agricultural Income Ordinance, 2000” promulgated on 30th June, 2000 provided the following definition of “agricultural income”:
“2. In this Ordinance unless there is anything repugnant in the subject or context–
(a) “Agricultural income” means–
(i) rent or revenue derived from land which is situated in the Province of Balochistan and is used for agricultural purposes;
(ii) any income derived from such land by agriculture or the performance by a cultivator or receiver of rent-in-land or any process ordinarily employed by cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market or in respect of which no process has been performed other than a process of the nature described hereinabove.
(iii) The sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him in respect of which no process has been performed other than a process of the nature described in paragraph (ii).
(iv) Any income derived from any building owned and occupied by the receiver of the rent or revenue of any such land, or occupied by the cultivator or the receiver of rent-in-kind, or any land with respect to which, or the produce of which, any operation mentioned in sub-clause (ii) is carried on:
Provided that the building is on, or in the immediate vicinity of the land, and is a building which the receiver of the rent or revenue of the cultivator, or the receiver of the rent-in-kind by reason of his connection with the land, requires as a dwelling house, or a store house, or other out building.”
This definition was in clear violation of Article 260(1) of the Constitution of Pakistan. No province could deviate from the definition of this expression given in the Income Tax law prevalent at the material time as required under Article 260 of the Constitution. The definition of “agricultural income” as prevailing at that time in section 2(1) of the Income Tax Ordinance, 1979 (corresponding to section 41(2) of the Income Tax Ordinance, 2001 reproduced above) was not followed by the Government of Baluchistan while promulgating the above-referred Ordinance—its section 2(a)(iii) in particular was ultra vires.
It is well-established from above analysis that the provinces either do not levy income tax on “agricultural income” (as defined in the Constitution) and where such a tax is imposed (in Baluchistan, Punjab and Sindh so far) the constitutional mandate and command stand violated. One wonders what is happening in Pakistan. The military and civil governments have both shown disrespect to Constitutional rule alike. This explains why constitutional democracy has failed to work in Pakistan—economic interests of landed aristocracy have primacy over the Constitutional rule whereas it should have been the other way around. No country can become a democratic society by just following the system of parliamentary democracy—restricting it to electioneering—unless it demonstrates by action—not through lip-service (that is very common in Pakistan) alone—that Constitutional commands are respected in letter and spirit. In Pakistan we have witnessed just the opposite behaviour, lawmakers themselves blatantly violate the law but insist that others respect and follow the rule of law for the perpetuation of their economic interests! The beginning of change in Pakistan will be the day when these classes are taxed.
The writers, authors of many books and tax advisers, are Visiting Professors at Lahore University of Management Sciences (LUMS).