Agricultural Income Taxation: Estimation of the Revenue Potential in Punjab

In May 2011 a senator of the Muttahida Quami Movement (MQM), moved a private member’s constitutional amendment bill to remove the exemption provided to agricultural incomes from federal income taxation. The proposed amendment mentioned a potential revenue of Rs 200 billion from Agricultural Income Tax (AIT). This figure, however, differs widely from some other reported estimates of potential agricultural income tax.1 The issue of AIT is likely to echo again in the parliament and outside as Pakistan grapples with the issue of its low tax revenues. It is, therefore, important to carefully analyse the potential revenue from AIT to allow more informed discussion and policy decisions on tax options at the federal and provincial levels. The 1973 Constitution of Pakistan gives provincial assemblies the exclusive power to make laws pertaining to taxes on agricultural income.2 Agricultural income could be interpreted narrowly to include crop farming and rental income from land, or more broadly to include income from livestock and animal husbandry. There is no ambiguity that income from the narrower interpretation falls within the domain of provincial taxation though there may be room for debate whether the provincial jurisdiction extends to the broader definition of agricultural income or not [see Nasim (2012)]. Since 1996-97 all four provinces have instituted some form of tax on agriculture land or incomes. In its implementation this tax is largely a land tax (based on acreage) rather than a tax on agricultural income.