IMF not pushing for agriculture tax reforms

The international monetary fund’s (IMF) $11.3 billion standby arrangement facility with Pakistan did not specify agriculture tax reform which leads to negligible revenue from the agriculture sector. According to the WikiLeaks this sensitive cable was sent by the US Ambassador Anne W. Patterson in March 2010. It said that income from agriculture accounts for 21 per cent of GDP and is technically subject to income tax, but actual revenue from agriculture is negligible. Much of the domestic criticism of the IMF programmeme is the accusation that the IMF is requiring agricultural tax reform.
On November 28, the IMF’s Resident Representative publicly announced that the IMF does not have specific requirements for how government revenues should be increased. Business leaders hope that the IMF programmeme will catalyse tax reform, broaden the tax base, but do not think that the Parliamentarians will confront the powerful agricultural lobby. Opposition leaders warn that any agricultural tax reform will come at a heavy political cost.
The Pakistani constitution places agriculture within the provincial purview. However, provincial tax collection efforts are weak, with low compliance, numerous exemptions, and special treatment regimes. Thus, although income from agriculture is currently technically subject to income tax and accounts for 21 per cent of GDP, revenue from agriculture is negligible, less than $12.8 million in FY 2008-09. To increase revenue from agricultural income, the Federal government is considering two potential solutions. First, it might pass federal legislation that mandates that provinces collect the agriculture income tax. An alternative is to get provincial assemblies to permit the federal government to collect agricultural income taxes on behalf of the provinces and then remit the revenues back to the provinces for local expenditure. No proposal has entered the legislative process.
Advocates of agriculture income tax reform, such as the Federal Board of Revenue (FBR), say that the proposal could provide significant revenue. In 2007, the FBR thought the agricultural income tax had the potential to generate revenue of over Rs60 billion a year. Joint Director FBR Shatido Pirzada reports that the GoP does not have reliable statistics on sectoral contributions to total income tax revenues for comparison. A progressive farmer from Bahawalpur and a former head of the Small and Medium Enterprise Development Authority (SMEDA), Iqbal Mustafa, disagreed with the estimates of revenue, saying that more than 90 per cent of farmers were either landless tenants or small land owners so any minimum income exemption would severely cut revenues. To date there has not been an empirical study on the subject.
On November 24, Pakistan agreed to a Stand-by Agreement (SBA) with the IMF, the documents are not yet public but the programme has sparked debate on what conditions the IMF funds were made available. On November 28, the IMF’s Resident Representative Paul Ross clarified comments made during a November 25 conference call by publicly stating that the SBA does not have specific requirements for how government revenues should be increased beyond improving the effectiveness of income tax collection. In particular, Ross said that the IMF did not require agricultural tax reform. De facto Finance Minister Shaukat Tareen had also made similar statements. Tareen said that the IMF only asked for improved tax enforcement and an increase in the tax to GDP ratio from 11 per cent to 15 per cent.
Director of the All Pakistan Textile Mills Association (APTMA) Anis-ul-Haq said that textile mills hope agriculture taxation will not increase cotton prices, a critical input. However, he said that the textile industry would not object to taxing agriculture or real-estate as it would improve the equitability of taxes. According to Majyed Aziz, a leading industrialist and former president of the Karachi Chamber of Commerce and Industry (KCCI), the business community has a generally favourable opinion of the IMF programme because, among other things, they expect it will catalyze tax reform. The KCCI expressed its hope that the GoP will now tax the real-estate and agricultural sectors, but he doubts the necessary legislation to tax agriculture will be enacted. He said support from the agricultural sector is the political base of most parliamentarians, including the ruling Pakistan People’s Party (PPP).
It says the Chief Coordinator and Information Secretary of the Pakistan Muslim League (PML-N) Ahsan Iqbal criticized the proposed agriculture tax reform. He said it will not yield significant revenue but will have adverse political ramifications. He supported increasing the general sales tax, improving tax collection, and taxing capital gains.