Agriculture Tax: Route To Evasion In Non-Agri Income

IN the seventh NFC award, the federal government was asked to raise the tax-to-GDP ratio to 15 per cent and the provinces were expected to effectively tax agricultural incomes. This would have enlarged the divisible pie and the provincial kitty. While the centre failed to reform the tax structure, the provincial governments paid no attention to mopping up the potential of agricultural incomes. The eighth NFC failed to give an award, leaving these issues — and more — to the ninth NFC. The Constitution limits income tax to non-agricultural incomes, a federal subject. Agricultural income falls in the provincial domain and is subjected effectively to a tax on land. This distinction is unfair as it violates the principle of taxing equal incomes equally (the so-called horizontal equity). It is also against the principle of ability to pay, as a large number of earners are not taxed at all (the so-called vertical equity). Worse, it provides a convenient route to non-agricultural income earners to evade federal income tax by declaring vast amounts as agricultural income. All the provinces together do not collect more than Rs2 billion. According to the latest annual report of the State Bank, this is 0.03pc of the agricultural GDP.