Introduction
The taxation system in Pakistan never performed
well in revenue generation. Taxes in any state are
inevitably significant; to run a government, taxes
are applied to individuals, corporations, and
businesses of any type, at every—national,
subnational,
and
provincial—level.
The principal priority of taxes is to produce
revenue. However, proper taxation assists in GDP
growth, which entails the dual nature of taxation.
From its foundation, Pakistan’s policy never
preferred duality in its taxation system. As the
economy of Pakistan grieved with the fiscal deficit,
a large piece of taxes was lost in budget balancing
and
interest
payments.
Political uncertainty and nonproductive tax
policies enhanced the inability of the state to carry
out fairness, efficiency, and convenience for the
people and businesses. In the long run, the tax
structure of Pakistan became exploitative in its
nature and played a central role in shrinking
transactions.
A large number of economic activities remain
unwritten and are not a formal part of the
economy. Such activities include corruption,
smuggling, black market, drugs, etcetera. The
actors consciously run away from taxes and
skillfully play the regulatory bodies to avoid
taxation.
Tax evasion is a deliberately illicit act carried out
by many individuals and corporations by finding
loopholes in the system. Farming is exempted
from taxation, so many industrialists purchase
land and report their industrial income as farming
income.
It seems almost impossible to draw an estimate
about tax evasion. Although many researchers
tried to present rough calculations, they were
unsuccessful in determining the weightage of
shocks to the already deteriorated economy of
Pakistan.
Tax Evasion in Agriculture
A substantial amount of income tax is evaded from
the agriculture sector’s sub-sector, the crop
section. This section is the backbone of the entire
agriculture sector and, in Pakistan, it is the most
neglected sector for income tax. It ranks 2nd in
contributions to the agriculture sector after
livestock.
The agriculture sector contributes 23.7% to the
GDP, while the crops section provides a 36.68%
share to the agriculture sector. According to the
Pakistan Bureau of Statistics, the important crops
contribute Rs 3387606 million, while the other
crops provide Rs 2077865 million to the national
GDP [at current basic prices of 2015-16].
The crops contributed 8.72% to the national GDP
during FY 2021-22, pushing the sector’s worth to
Rs 5.4 trillion. The total direct taxes collected
was Rs 2284.9 billion during 2021-22 FY. The
income tax from agriculture across the country is
only Rs 2.870 billion; only Punjab contributes Rs
2.11 billion, with the share of KPK standing at 88.3
million, Sindh’s contribution at 707.3 million, and
Balochistan’s at 64.5 million.
The agriculture income tax to direct tax ratio
stands at 0.0014%, while the direct tax to GDP
ratio stands at 3.67%. The other sectors provide
3.66% of the total direct taxes. These figures
indicate heavy income tax evasion from the
agriculture sector. The tax exemption which is
given to the agriculture sector in article 41 of
the Income Tax Ordinance, 2001 is only applicable
to two types of farmers, one whose income is less
than 4 lac and the other whose land is less than
12.5 Acres.
However, a large number of people assume tax
exemption through this article. The figure was
reported at 165,000 taxpayers seeking exemption
during FY 2019-20, according to the FBR
documents.
Way Forward
The government needs to take measures to reduce
income tax evasion from the agriculture sector.
The other two sectors, industries and services,
provide 3.66% as a direct tax share in the total
taxes. If the government were to manage to collect
even 1% from the crops section of agriculture, it
would raise more than 54 billion in income tax.
Livestock is the largest contributor to the
agriculture sector, but the income tax evasion is in
billions. The tax agencies need to pay heed to
these sectors because increasing the tax rate on
the already tax-paying sectors is not the solution
for revenue collection. In the last two years,
the tax-to-GDP ratio dropped below 10% which is
alarming, and it compels the authorities to
concentrate on other sectors of the economy for
revenue generation.