Agricultural Income Taxation: Estimation of the Revenue Potential in Punjab

This paper attempts to quantify the potential income tax revenue from crop farming and land rental in Punjab, the province which accounts for over 65 percent of the production of most major crops in Pakistan. Our estimates suggest that in the tax year 2010, the tax revenue potential from crop farming and land rental from an agricultural income tax, at rates comparable with federal income tax, was Rs 55–75 billion. Using a more limited data set to project taxable income for the financial year 2012-13 and using the tax rates applicable under the Finance Act 2012, the tax potential for the tax year 2013 is estimated to be about Rs 30 billion. The paper concludes broadly that under the current income tax rates, the perception about the agricultural income tax potential is exaggerated, but the revenue potential is still very large relative to the actual tax collection by the provinces. Taxing this source of income at rates applicable to similar incomes in other sectors of the economy will not only supplement the finances of the provincial governments, but will also have an important symbolic value in terms of fairness and equity.