Taxing agricultural income

None of the four provinces followed the Constitution while levying income tax on agricultural income

By Huzaima Bukhari and Dr. Ikramul Haq

Taxing income earned through agricultural activities is the sole prerogative of provincial governments under the 1973 Constitution of Pakistan. All the four provinces have enacted laws to this effect, but total collection in 2009 was below Rs. 2 billion against the actual potential of Rs. 200 billion (share of agriculture in GDP was about 22 percent). This abysmally low collection proves beyond any doubt lack of political will to tax the rich absentee landlords. Presently, the provincial governments are not collecting tax on agriculture income but on fixed per acre basis. They charge Rs.150 per acre from the irrigated area and Rs100 per acre from non-irrigated land. This is gross violation of Constitution that requires tax on agricultural income.

Entry 47, Part 1 of Federal Legislative List provided in Fourth Schedule to the Constitution empowers the federal government to levy "taxes on income other than agriculture income". The expression "agricultural income" is defined in Article 260(1) of the Constitution, which says: "Agricultural income" means agricultural income as defined for the purpose of the law relating to income tax."

This is an exhaustive definition binding provincial Legislatures to levy tax on "agricultural income" as defined in the Income Tax Ordinance, 2001. The definition of "agricultural income" as contained in section 41(2) of the Income Tax Ordinance, 2001 has to be followed by all the provinces. The said definition defines agricultural income to mean (a) any rent or revenue derived from land which is situated in Pakistan and is used for agricultural purposes and (b) any income derived by a person from land which is situated in Pakistan from agriculture; or the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market; or the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in paragraph (ii) and (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) (b) or (ii) any building occupied by the cultivator, or the receiver of rent-in-kind, of any land with respect to which, or the produce of which, any operation mentioned 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 his connection with the land, requires as a dwelling-house, or as a store-house, or other out-building.

It is pertinent to note that the above definition cannot be altered even by the parliament without the prior sanction of President of Pakistan as provided in Article 162 of the Constitution forbidding that "no Bill or amendment which imposes or varies a tax or duty the whole or pat of the net proceeds whereof is assigned to any Province, or which varies the meaning of the expression "agricultural income" as defined for the purposes of the enactments relating to income-tax, or which affects the principles on which under any of the foregoing provisions of this Chapter, moneys are or may be distributable to Provinces, shall be introduced or moved in the National Assembly except with the previous sanction of the President."

The historical record shows that this Constitutional command was violated even by the authors of the Constitution. By the Finance (Supplementary) Act, 1977, the definition of agricultural income as obtaining in section 2(1) of then Income Tax Act, 1922 was amended by the words: 'and is either assessed to land revenue in Pakistan or subject to a local rate assessed and collected by the officers of the Government as such' were deleted. The aim of this exercise was to broaden the scope of agricultural income with a view to subjecting it to tax for which a schedule was also enacted.

This was a revolutionary step to impose tax on agriculture income for the first time in Pakistan, though approval of President was not sought as required under the Constitution. It is tragic that on 5th July 1977, the government of Zulifkar Ali Bhutto was overthrown by a military dictator. The historic decision of taxing "agricultural income", as passed by Federal Parliament in the shape of Finance Act, 1977, was thwarted by the military regime of Ziaul Haq. Zia's legacy continued for long 11 years and that of General Musharraf for nearly 9 years, but feudal lords (including mighty generals who received state lands as gallantry awards or otherwise!) did not pay a single penny as agriculture income tax.

Both the federation and provinces under the Constitution are bound to follow the definition of "agricultural income" as provided in the income tax law while determining their legislative powers in terms of Article 70(4), Article 141 and Article 142 read with Forth Schedule to the Constitution. However, it is a matter of great concern that the federation violated the commands of Constitution as narrated above in respect of tax on "agricultural income". The same is true for the Provincial Legislatures. Even a cursory look at laws (and amendments therein) from time to time promulgated by them to tax agricultural income shows that:

NWFP did not even provide the definition of "agricultural income" in its "Northwest Frontier Province Agricultural Income Tax Ordinance, 1993"! The tax levied under the name of "income tax" was, in fact, a land tax on the basis of produced index units. This was nothing but a mockery of legislative process. If there was no political will to impose income tax on agricultural income, then what was the need to hoodwink the people by calling it Agricultural income tax?

The same is the case with Sindh Agricultural Income Tax Act of 1994 as amended from time to time.

The Punjab Agricultural Income Tax of 1997, as amended from time to time, is no exception. No effort was made till 2000 to impose income tax on total income earned from this source. A face-saving device has been restored to levy yet another levy on acre basis for different rate in respect of irrigated and unirrigated lands.

In Balochistan, the position was no different. From 1993 to 1999, the Baluchistan Legislature promulgated various Agricultural Income Tax Ordinances, amended from time to time, following the same pattern as in three other provinces. In 2000, it passed The Balochistan Tax on Land and Agricultural Income Ordinance, 2000 that contained the same definition of "agriculture income' as in income tax law promulgated by the federation.

The above analysis shows that none of the four provinces, while levying income tax on agricultural income, followed Article 260 of the Constitution. All the laws passed by them for taxing "agricultural income" were sham. It shows an attitude of contempt and apathy towards Constitutional provisions. One hopes the federal government and all the provincial governments will take note of it and remedial measures will be provided in the forthcoming national and provincial budgets.