Impact of Agricultural Income Tax

on Pakistan Economy
.

Presented By: Irfan Arshad
Introduction
Agriculture accounted for GDP: 53% (1947); 23% (2005); 21%
(2011)
Pakistan ranks 5
th
in Muslim World & 20
th
worldwide in farm output.
Pakistan is worlds 5
th
largest milk producer.
Pakistan is worlds 4
th
largest cotton producer.
Livestock sector contributes 11% of GDP
Pakistan is Asias largest camel market, Second largest apricot and
ghee market, Onion and Oil market.
Fisheries provide direct employment to 400,000 and indirect
employment to 500,000 people. It contributes approx $ 120 million to
exports
Introduction
Main provider of raw material for two of the most imp industries
in Pak i.e textile and sugar.

Paks unsatisfactory agri performance is mainly due to
traditional methods of cultivation, illiterate ad uninformed rural
population.

Supply for other inputs has been increased i.e tractors imported
and locally manufactured, fertilizers, seeds, irrigation

Despite of this increased input, the output has not been
increased accordingly.
There is a decreasing returns to scale in agri sector.
Introduction
Pakistan has low tax / GDP ratio compared to neighbouring
countries. In 2010, tax to GDP ratio was 10%.
Only 1 % registered income tax payers against 180 million
population.
In 2010-11, fiscal deficit increased to 6.6% of GDP. Financing
of fiscal deficit has shifted towards central bank financing.
Pakistans agriculture sector employs around 45% of
workforce.
Pakistans agriculture sector contributes around 21% to
Pakistans GDP, however contribution to tax revenue is not
comparable.

Introduction
In recent years, the price of certain agriculture
commodities has increased which has raised rural
incomes.
Income Tax Ordinance of 2001 gave exemption for tax on
income from agriculture.
There is a need to reduce government deficit.
Debate over increasing government revenue through
agriculture income tax.
Opponents of agriculture income tax argue that agriculture
sector is already taxed indirectly through pricing structure.
Supporters of agriculture income tax argue that sector
should pay fair share.
Introduction
There are arguments on whether agri income should be taxed or
not.

NCA is against this argument and says that agri holdings are too
small to generate taxable income.

Agri is a risky business and heavily depends on natural factors
which creates uncertainty in final output.

No proper insurance of agri output.

Agri sector pays the largest percentage of indirect taxes i.e 42%
of all indirect taxes, so it should not be taxed more.
Introduction
On the other hand National Taxation Reforms Commission
(NTRC) has evaluated policies of imposing a tax on agriculture.

There is a group of landowners who reside in urban areas and
made investment in real estate with income from their agri
business.

Since they pay no tax, so they are questioned by traders and
salaried class to pay tax.

Many traders have purchased agri land with an intent to escape
from income tax.

Many large farmers are earning handsome amount of money
from agri.
Sources of Tax Revenue
Contribution % in 2009-10
GDP Growth Tax Revenue
Agriculture
21 10 1
Industry
21 30 63
Services
58 60 26
Source: Federal Bureau of Statistics, Federal Board of Revenue

Review of Literature
Lewis and Hussain (1967) and covered the
period between 1951 till 1964 about inter
sectoral terms of trade either used weighted
price indices to estimate the consumption of
goods by both sectors

Gotsch and Brown (1980) who calculated the
terms of trade index using the same
methodology. Their findings also suggested a
decline in the terms of trade index for
agriculture.
Review of Literature
Kazi (1987) used another methodology and
calculated the inter-sectoral terms of trade
between 1970 and 1982.
Qureshi (1987) criticized the methodology
used by Kazi by arguing that the calculated
weights were misleading because they were
from retail rather than wholesale prices.
Aftab et al. (2009) used the same
methodology used by Qureshi and calculated
the inter-sectoral terms of trade for agriculture
in Pakistan for the period of 2000 till 2008.
Problem
Calculate terms of trade for agriculture
in Pakistan from 2000-01 to 2009-10.
Research effect of an imposition on
agriculture income tax on Pakistans
economy using CGE Model.
Determine effect on production and
income.
Methodology
Terms of Trade compares returns to a
sector with payouts made by the sector.
In this case Terms of Trade is
comparison of agriculture sector to
industrial sector.
Laspeyres formula = export price index
/ import price index.
(Base period 2000-01)

Methodology
CGE Model is used to evaluate the
impact of economic & policy shocks,
policy reforms in the economy as a
whole.
CGE is linked to the Social Accounting
Matrix (SAM) of 2007-08
Terms of Trade for Agriculture in
Pakistan
Year Trade of Term
2000-01 100.00
2001-02 98.80
2002-03 97.34
2003-04 95.47
2004-05 95.10
2005-06 95.57
2006-07 101.03
2007-08 94.97
2008-09 99.42
2009-10 99.16
Terms of Trade is favorable if TOT > 100
Terms of Trade is unfavorable if TOT < 100
Description of Sam
Activities 51: (Agriculture = 12, Industry =
22, and Services = 17)
Commodities 50: (Agriculture = 11, Industry
= 21, and Services = 18)
Factors 27: (Labor = 10, Land = 12, and
Other Factors = 5)
Households 18: (Rural = 15, and Urban =
3)
Other Institutions Accounts 4
Households in SAM
Household medium and large farm (Sindh, Punjab,
and other)
Household small farm (Sindh, Punjab, and other)
Landless farmer (Sindh, Punjab, and other)
Waged rural landless farmer (Sindh, Punjab, and
other)
Rural non-farm (quintile 1, quintile 2, and other)
Urban (quintile 1, quintile 2, and other)
Simulations
Simulation
Number
Description
1 5 percentage point increase in income tax on large -
medium farmers only
2 10 percentage point increase in income tax on large
- medim farmers only

3 5 percentage point increase in income tax on large
medium farmers, and 5 percentage point increase in
income tax on small farmers
Note on simulations

Closure: Foreign savings is fixed, real
exchange rate adjusts. Government
savings fixed, government expenditure
adjusts.
Static model
Marginal Propensity to save is fixed

Results
Impact on overall economy
Variable Simulation #1

Simulation #2

Simulation #3

Public Income 4.2 % 8.5 % 12.6 %
Private Consumption - 0.4 % - 0.8 % - 1.1 %
Fixed Investment

1.6 % 3.1 % 4.4 %
Real Government
Consumption
- 0.1 % - 0.4 % - 0.8 %
Real Exchange Rate
(positive change =
depreciation)
0.14 % 0.28 % 0.54 %
Exports 0.0 % 0.0 % 0.2 %
Imports 0.0 % 0.0 % 0.1 %
GDP 0.0 % 0.0 % 0.0 %
Impact on output
Output Variable

Simulation #1

Simulation #2

Simulation #3

Livestock industry

0.0 % 0.0 % 0.0%
Wheat 0.1 % 0.1 % 0.3 %
Cotton 0.0 % 0.0 % 0.10%
Rice - irrigated 0.0 % 0.0 % - 0.1 %
Sugarcane - 0.1 % - 0.1 % - 0.4 %
Construction sector

1.3 % 2.6 % 3.7 %
Manufacturing
industry

0.2 % 0.3 % 0.5 %
Cement industry

0.9 % 1.9 % 2.7%
Impact on price
Price Variable

Simulation #1

Simulation #2

Simulation #3

Livestock industry

-0.4 % -0.7 % -1.0%
Wheat 0.0 % 0.0 % - 0.3 %
Cotton 0.0 % 0.0 % - 0.2%
Rice - irrigated 0.0 % 0.0 % - 0.1 %
Sugarcane 0.0 % 0.0 % - 0.3 %
Construction sector

1.1 % 2.2 % 3.4 %
Manufacturing
industry

0.7 % 1.5 % 2.6 %
Cement industry

1.5 % 3.1 % 4.7%
Impact on household consumption
Household

Simulation #1 Simulation #2

Simulation #3

Large medium farm
owners
- 5.2 % - 10.3 % - 5.6 %
Small farm owners - 0.5 % - 0.1 % - 5.5 %
Landless farmer - 0.1 % - 0.1 % - 0.1 %
Waged rural landless
farmer
0.0 % 0.0 % 0.2 %
Rural non-farm quintile 1 0.1 % 0.2 % 0.5 %
Rural non-farm quintile 2 0.1 % 0.3 % 0.6 %
Rural non-farm other 0.2 % 0.3 % 0.7 %
Urban quintile 1 0.2 % 0.4 % 0.9 %
Urban quintile 2 0.2 % 0.5 % 1.0 %
Urban other 0.3 % 0.6 % 0.9 %
Summary
Terms of Trade for agriculture sector in
Pakistan has improved in recent years.
Public income increasing as a result of
tax. Investment is increasing
(specifically in non-agriculture sectors).
Demand for labor is increasing in non-
agriculture sectors (specifically in
construction, manufacturing, and
cement).
Minimal impact on GDP.


Conclusion
Terms of Trade estimates suggest that
agriculture sector is not at
disadvantage. Can think about
agriculture income tax.
Agriculture income tax not as harmful to
overall economy.
For a country to develop, labor has to
shift from agriculture towards industry /
services sectors.
Policy Implications / Suggestions
Income tax on agricultural income hurts
households producing agricultural
commodities but helps non-agriculture
sectors.
Argument in favor of income tax on
agriculture in order to increase
government income and reduce deficit.
Government should promote policies
which allow for income tax on agriculture
income for large farm owners.

References
Aftab, S., Cororaton, C. and Jansen, H.G.P. (2009).
Domestic Terms of Trade in Pakistan Implications for
Agricultural Pricing and Taxation Policies. Paper for
Food and Agriculture Organization (FAO) and the World
Bank

Bahl, R., S. Wallace and M. Cyan (2007). Pakistan
Provincial Government Study. Unpublished background
paper for the 2008 Pakistan Tax Policy Report being
prepared by the Federal Board of Revenue in
collaboration with the World Bank. Islamabad.
References
Cheong, K.C. and E.H. DSilva (1984). Prices, Terms
of Trade and the Role of Government in Pakistan's
Agriculture. World Bank Staff Working Paper No.
643. Washington D.C.
Debowicz, D., Robinson, S., and Haider, H. (2012).
Tax Policies in Pakistan- Preliminary Economy-Wide
Assessment. International Food Policy Research
Institute (IFPRI) Washington D.C. Unpublished
Gotsch, C.H. and G. Brown (1980). Prices, Taxes
and Subsidies in Pakistans Agriculture, 1960-75.
World Bank Staff Working Paper No. 387.
Washington D.C.
References
International Monetary Fund (February 2012).
Pakistan 2011 Article IV Consultation and Proposal
for Post-Program Monitoring. IMF Country Report No.
12/35
Kazi, S. (1987). Inter-sectoral Terms of Trade for
Pakistans Economy 1970-71 to 1981-82. Pakistan
Development Review XXVII (2) (Spring).
Lewis, S.R. (1970). Agricultures Terms of Trade.
Pakistan Development Review X (3). (Autumn).
Lewis, S.R. and S.M. Hussain (1967). Relative Price
Changes and Industrialization in Pakistan 1951-64.
Pakistan Institute of Development Economics (PIDE),
Monograph No. 16. Karachi.
References
Malik, S. (2004). Study on Tax Potential in
NWFP. Innovative Development Strategies,
Ltd. Mimeographed. Islamabad.
Pakistan Institute of Legislative Development
and Transparency (PILDAT) (2011). Taxing
the Agriculture Income in Pakistan Briefing
Paper No. 42
Qureshi, S.K. (1987). Agricultural Pricing and
Taxation in Pakistan Some Policy Issues.
Pakistan Institute of Development Economics
(PIDE). Islamabad.
Thank You