Pakistan: Provinces and agricultural income tax
By Huzaima Bukhari and Dr Ikramul Haq
The issue of distribution of taxation powers between the federation and federating units in Pakistan has assumed renewed significance in the wake of 18th Constitutional Amendment and announcement of 7th National Finance Commission Award.
The provinces can now levy taxes on all those subjects that are not part of the Federal Legislative List. Elimination of the Concurrent List has paved the way for exclusive taxation by the provinces on items that were previously shared by the federation. The federation still wants to retain certain taxes, e.g. sales tax on services by using the pretext that provinces lack the capacity to collect the same. Certain quarters are also campaigning for levy of agricultural income tax under Federal Legislative List by amending Entry 47 of the Federal Legislative List. At present, Entry 47 debars the federation from levying income tax on "agricultural income".
The provinces should retain exclusive right to collect income tax from agriculture as source of this income is land, ownership of which lies with the provinces. In British India, the right to levy income tax on agriculture vested with the provinces and not the centre. In India as well the position remains the same. In Pakistan, the tragedy is that the provinces have shown complete indifference in levying agricultural income tax from 1947 to 1996. In 1997, under tremendous pressure from foreign donors, all the four provinces did promulgate laws to this effect, but none of them understood the constitutional position in this regard. They overlooked the most vital question: What exactly constitutes "agricultural income"? If definition of this expression is not exclusive and binding, there will always be conflict between the Centre and the provinces on the question of what should be taxed under Entry 47 and what should remain out of its bound.
Framers of the 1973 constitution were aware of the sensitivity of this matter and, therefore, categorically provided what "agricultural income" was. Article 260(1) of the Constitution in respect of this expression says: "Agricultural income" means agricultural income as defined for the purpose of the law relating to income tax.
The above expression refers to income tax law, meaning by that whatever definition is provided therein, would apply where federal government gives exemption and where the provinces intend charging income tax. The federal government cannot change the definition of "agricultural income" without taking the President's prior consent as envisaged in Article 162 of the Constitution. It debars the federal government from presenting any bill in the assembly purporting change in the definition of "agricultural income" unless the matter is first presented to the president for approval. It is obvious that any unilateral adverse change in the definition by the National Assembly can have serious implications for provinces to collect tax from this source.
The provinces are also bound to follow the definition of "agricultural income" as given in the income tax law. Any deviation from the said definition would be unconstitutional as levy of tax on this source cannot go beyond the limits laid down in the Income Tax Ordinance, 2001, which defines "agricultural income" as under:
(2) "agricultural income" means
(a) any rent or revenue derived by a person from land, which is situated in Pakistan and is used for agricultural purposes;
(b) any income derived by a person from land situated in Pakistan from-
(ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by such person to render the produce raised or received by the person 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 such person, in respect of which no process has been performed other than a process of the nature described in sub-clause (ii); or
(c) any income derived by a person from-
(i) any building owned and occupied by the receiver of the rent or revenue of any land described in clause (a) or (b);
(ii) any building occupied by the cultivator, or the receiver of rent-in-kind, of any land in respect of which, or the produce of which, any operation specified in sub-clauses (ii) or (iii) of 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 the person's connection with the land, requires as a dwelling-house, a store-house, or other out-building."
As evident from above, the definition of "agricultural income" is not restricted merely to income from sale of produce of cultivated land. It also covers rent of land and any building located on such land. It is lamentable to note that all the provinces while levying income tax on agriculture violated the unambiguous command of supreme law of the land. Instead of levying tax on "agricultural income" as defined in the income tax law, the province levied tax on land – indirect tax having no nexus with quantum of income earned by a person.
The province of Punjab, while levying tax on agricultural income under the Punjab Agricultural Income Tax Act 1997 (hereinafter "the Act"), grossly violated the command of the Constitution by providing that cultivated land would be deemed to be agricultural income. By doing so, agricultural income tax was converted into land revenue based on acreage.
The rates provided in the First Schedule to this Act says that if ownership is up to 121/2 acres there will be no tax, where it is more than 121/2 but less than 25 acres, Rs 150 per acre and beyond 25 acres, it would be Rs 250 per acre. From 1st July 2001, however, by virtue of section 3(3) of the Act, agricultural income tax in the real sense was provided by suggesting progressive rates on net income basis in the Second Schedule.
After allowing minimum exemption of income of Rs 80,000, rate of tax where income does not exceed Rs 100,000 it is 5% of total income; where income exceeds Rs 100,000 but does not exceed Rs 200,000 it Rs 5,000 plus 71/2% of amount exceeding Rs 100,000; where income exceeds Rs 200,000 but not Rs 300,000, it is Rs 12,500 plus 10% of amount exceeding Rs 200,000 and in the last slab where total income exceeds Rs 300,000 it is Rs 22,500 plus 15% of the amount exceeding Rs 300,000.
With the introduction of net income taxation, the acreage tax should have been abolished but section 3(4) of the act says that out of net profit tax and acreage tax, the greater would be payable. Here lies the great catch. Nobody is filing return of net income and by paying paltry acreage tax, is posing as if this is greater than tax on net income. Under the First Schedule to the act, rich absentee landlords are happy paying merely Rs 250 to Rs 300 per acre.
The self proclaimed Khadim-e-Aala of Punjab is least bothered to enforce progressive taxes in his domain while constantly criticising the federal government for its inactions. Under his dictatorial control, the collectors are totally disinterested in enforcing the law by asking for returns of agricultural income as envisaged in the act.
Violation of this law is evident from the very fact that even the Prime Minister of Pakistan has showed nil agricultural income tax in his declaration before the Election Commission (EC) of Pakistan, despite admitting ownership of substantial agricultural lands. Such absentee landlords-turned-industrialists dominate our economics and politics.
Most of the rich absentee landlords, having colossal agricultural income, especially in Punjab and Sindh, are not paying any personal tax, at least their declarations before the EC testify to this effect. In case, they are paying proper income tax on their agricultural and other incomes, they must produce the necessary evidence. This would inspire the people to discharge their own obligations diligently.
In case they have not done so, the process of disqualification in view of Articles 62 and 63 of the Constitution should be initiated forthwith. This exercise will pave the way for true democratisation of the country. All tax delinquents should be debarred from taking part in elections and those already in assemblies should be disqualified after completing due process of law.
(The writers, legal historians, authors of many books, tax advisers, are members of visiting faculty of Lahore University of Management Sciences (LUMS).