Fiscal Space for Investment in Agriculture— A Review of Taxes andSubsidies in Agriculture in Pakistan

Despite agriculture’s importance in terms of its relationshipto poverty and welfare of the poorest households, the government findsit increasingly difficult to find the fiscal space for budgetaryallocations for agriculture and agricultural RD. We hypothesisethat expansion of expenditures on agriculture is possible in the shortto medium run with a combination of reallocations and new taxation. Weargue that existing spending aimed towards the agriculture sectorincludes very large outlays on implicit subsidies that are largelyunproductive. These costs include: subsidisation of gas for fertiliserplants, which approach Rs 48 billion in gas subsidies to fertilisercompanies; the full costs of the infrastructure and operation andmaintenance of the irrigation system, which amount to Rs 166 billion peryear; and losses on wheat procurement, which have been about Rs 25billion recently. On the taxation side, while agricultural producers arenot currently liable to pay tax on income, they do however pay indirecttaxes on agricultural inputs. Using a Social Accounting Matrix (SAM), weestimate agricultural producer pay about Rs 61 billion, mostly from GSTtaxes on fertiliser. Using a Computable General Equilibrium model, weshow that agriculture could contribute further with an income tax onagricultural income. With a ―low-rate-widebase‖ income tax of 15 percenton non-poor, medium and large farms, as much as Rs 130 billion could beraised, enough to cover, for example, a sizable portion of the operationand maintenance cost of the irrigation system. JEL Classifications: D58,E16, H20, H22, H23, Q10 Keywords: Agriculture, Fiscal Policy, Subsidies,Taxation, General Equilibrium, Social Accounting Matrix,Pakistan