WB wants Pakistan to bring farm income, properties into tax net

 Pakistan, like many developing countries, faces significant challenges in mobilizing domestic resources to finance essential public services and development projects. A key aspect of this challenge is the low tax-to-GDP ratio, which is consistently below international standards. In a recent development, the World Bank (WB) has encouraged Pakistan to take bold steps to broaden its tax base by including farm income and property in the tax net. This article delves into the reasons behind this recommendation and explores the potential benefits it could bring to Pakistan's economy.

Current Tax Landscape in Pakistan

Pakistan's tax collection system has long been characterized by a narrow tax base with a disproportionate reliance on indirect taxes such as sales tax and excise duties. This imbalance places a heavy burden on lower-income sections of society, while high-net-worth individuals, including large landowners, often escape their fair share of taxes.

The agricultural sector, a major contributor to Pakistan's economy, has remained largely untaxed. Agriculture employs nearly 40% of the country's workforce and contributes approximately 24% to GDP, yet has historically been exempt from income tax. This exemption not only led to revenue losses, but also perpetuated inequality, as large landowners enjoy tax-free income from their land.

Why include farm income and characteristics?

Broadening the tax base: Bringing farm income and assets into the tax net is a crucial step in broadening the tax base. This would mean that more individuals and entities, especially those with substantial land holdings, would contribute to the national income.

Increased revenue generation: Taxing farm income and property could significantly increase government revenue collection. Additional funds could be allocated to infrastructure development, education, healthcare and poverty alleviation programs, thereby improving the overall quality of life of Pakistani citizens.

Enhanced Equity: Taxing agricultural income and property can reduce income inequality in Pakistan. It ensures that wealthy landowners who benefit from large tracts of fertile land contribute more equitably to the country's development.

Promotion of productivity and modernization: Taxation can encourage modernization and increase productivity in the agricultural sector. It can encourage landowners to adopt advanced farming practices and invest in technology to maximize their yields, ultimately benefiting the economy.

Compliance with International Norms: Pakistan's agricultural income tax exemption is an anomaly compared to international tax norms. Aligning tax policy with global standards can improve Pakistan's standing in the international community and potentially attract foreign investment.

Challenges and Considerations

While bringing farm income and assets into the tax net holds enormous potential, it also presents several challenges:

Opposition from powerful lobbies: Landowners and influential agricultural lobbies may resist these tax reforms, leading to political and social challenges.

Administrative capacity: Taxation of agricultural income and property requires the development of appropriate administrative mechanisms and training of tax officials, which can be resource intensive.

Ensuring the protection of small farmers: Any tax policy should include measures to protect small farmers who may not have the same financial capacity as large landowners.

Addressing land book issues: Pakistan also faces issues related to land records and land ownership that need to be addressed in order to implement these tax reforms effectively.

The World Bank's recommendation that Pakistan include farm income and property in the tax net is a pragmatic step to address the country's fiscal woes. By broadening the tax base and encouraging equitable contributions from all segments of society, Pakistan can not only increase its revenue but also reduce income inequality and promote economic growth. However, these reforms must be carried out carefully, with due regard to the unique challenges presented by the agricultural sector, to ensure that the benefits are realized while minimizing the potential disadvantages.