The Theory and Practice of Agricultural Income Tax in Pakistan and a Viable Solution

Abstract

Pakistan has a history of taxing agriculture through the land revenue system. Being income and price inelastic, the replacement of the system with agricultural income tax is considered inevitable for meeting the financial needs of a growing national economy. In fact, under pressures from World Bank and International Monetary Fund (IMF), Pakistan introduced various variants of agricultural income tax in the past and in full during 1993 and 1996 respectively [World Bank (1999)]. However the introduction of agricultural income tax is a highly controversial issue in Pakistan, in government circles as well as among professional researchers and economists. Out of the nine commissions [Pakistan (1959, 1960, 1963, 1964, 1970, 1975, 1986, 1988, 1989 and 1993a)] that studied agricultural taxation only two recommended it. [Pakistan (1960, 1993a)]. The remaining seven favoured the existing land revenue system. The studies of individual economists are no less controversial in this respect. There seems to be a general consensus among such writers as [Hamid (1970); Yaqub (1971); Chowdhury (1971); Khan (1991) and World Bank (1999)] on the repeal of land revenue system in favour of agricultural income or graduated land tax. Against this an equal number of economists, have shown dissatisfaction with agricultural income tax as an effective tool of taxing agriculture [Ahmad and Stern (1989); Bird (1974); Bird and Oldman (1990); Chaudhry and Maan (1993); Gold and Foster (1972) and Newbery (1987)].