Overseas Investors Chamber of Commerce and Industry (OICCI) have urged the Punjab government to collect agriculture tax on the basis of net income instead of landholding. This demand has been made by various sectors, sub-sectors, domestic economists as well as international donor agencies/bilaterals in the run-up to the preparation of provincial budgets for decades with one overarching and laudatory objective: to increase the revenue pie based on the principal of equity determined by the ability to pay.
This is particularly relevant today as the federal government is focused on increasing its share of the funds under the 2010 seventh National Finance Commission (NFC) award and/or revisiting Article 160 (3 A) of the constitution, a component of the 2010 18th Amendment, that disallows a reduction in the share of the provinces from the previous award. Many alternate proposals have been floated to the federal government including allowing provinces to levy octroi and zila tax again, and thereby retaining 3.5 percent of the divisible pool; however, none seems to find any traction with the federal government.
Shaukat Tareen, during whose tenure as Finance Minister the seventh NFC award was agreed, has repeatedly stated that the seventh NFC award reflected a consensus on the need to increase the size of the revenue pie with an agreement that each subsequent year the tax to Gross Domestic Product (GDP) ratio would be raised by one percent. Sadly, the tax-to-GDP ratio was under 10 percent in 2010 and remains under 10 percent even today which explains the paucity of funds both at the federal and provincial levels. The way forward is therefore clear: raise revenue and in this context taxing the rich farmers on their income instead of giving them the option to pay on their landholdings would generate considerable resources for the provinces. And with Punjab leading the way the Sindh government as well as other provinces would be compelled to follow suit.
Additionally, the 18th Amendment devolved several subjects to the provinces including agriculture, education, health, social sector development; however, the Centre retained all, some under different names, and continues to allocate large sums to administering these devolved subjects every year. This must be abandoned and the provincial resource base strengthened to enable them to meet these additional expenses.
Disturbingly, the major impediment to the adoption of the OICCI proposal remains the overwhelming majority of feudal lords with large landholdings sitting in the country’s National Assembly, who continue to successfully shoot down any proposal through a constitutional amendment to allow the federal government to tax farm income on the same basis as other income sources. In the provincial assemblies, the option to pay tax on landholdings is preferred over the option to pay on net income given that the tax payable on landholdings is an insignificant amount to tax payable on net income.
Punjab with a PTI government, closely monitored by Prime Minister Imran Khan, can lead the way forward and go down in history as having made a difficult and politically challenging decision that changed the destiny of poor people in the province in general and, in time, of the entire country. In the event that there is resistance from the rich landlords it can be overcome by reaching across the aisle and enlisting support of the non-feudal members of the Punjab Assembly sitting on the opposition benches who too would like to break the feudal shackles. Increased collection of income tax would reduce reliance on indirect tax collections whose incidence on the poor is relatively higher than on the rich while targeting the rich to pay income tax.
