Dr Shabana Safdar Khan
The chairman of the Federal Board of Revenue recently made yet another appeal to the provinces. Speaking at the Afkaar-e-Taza Thinkfest in Lahore, Rashid Langrial urged provincial governments to expand their tax collection efforts and reduce their dependence on federal transfers. The argument is familiar. The provinces rely too heavily on their share of divisible pool taxes rather than generating their own resources. The agricultural sector in particular remains undertaxed, with farm incomes escaping the kind of taxation that the salaried class routinely bears.
This complaint from the federal government is not new. It reflects a genuine fiscal imbalance. The Centre budgets massive deficits, projecting a gap of 6.5 trillion rupees between revenue and expenditure in the current year. Such deficits necessitate heavy borrowing from both domestic and international sources. The provinces by comparison maintain far smaller debt stocks. Punjab has budgeted its debt at 1710 billion rupees while Sindh stands at a mere 38.5 billion rupees. The provinces can afford this relative fiscal discipline precisely because they receive guaranteed transfers from the federal divisible pool. They have little incentive to impose unpopular taxes on their own populations when they can simply draw from the Centre’s collections.
The demand for provinces to expand their own resource mobilization comes not only from the federal government but also from international lenders. The International Monetary Fund has consistently pressed Pakistan to broaden the tax base and reduce reliance on federal transfers. Yet this objective remains perpetually compromised by the failure to reach consensus on a new National Finance Commission award. The NFC award determines the distribution of revenues between the Centre and the provinces. Discussions on a new award have been suspended for years now. The Centre periodically expresses optimism about imminent approval while the provinces invoke constitutional protections that prevent any rollback in their share from previous awards. This constitutional safeguard ensures that vertical distribution can only move in one direction, guaranteeing provinces an ever-increasing share of the divisible pool.
Within this broader context of fiscal federalism, agricultural taxation has emerged as a particular point of contention. Agriculture income tax falls under provincial jurisdiction according to the Constitution. The IMF in its second review of the ongoing seven billion dollar Extended Fund Facility programme noted that provinces have begun implementing new agricultural income tax regimes. These measures include steps to strengthen compliance, address underreporting, and improve communication between tax authorities. The Fund also acknowledged that provinces have ensured most services are subject to general sales tax with only limited exemptions.
However significant obstacles remain. The most important barrier according to the IMF is the lack of operational information sharing between the Federal Board of Revenue and provincial tax authorities. Without such coordination, tax evasion becomes far easier and enforcement remains weak. But this administrative challenge pales in comparison to a far more fundamental problem that both the federal government and the IMF have simply ignored.
The current approach to agricultural taxation focuses almost exclusively on crops. This focus does not reflect the actual structure of Pakistan’s agricultural economy. Agriculture contributes approximately twenty four percent to the national Gross Domestic Product. Within this agricultural GDP the composition reveals a striking imbalance. Major crops including wheat, rice, sugarcane, maize and cotton contribute no more than five percent of national GDP. Yet these crops receive the overwhelming attention of tax authorities when discussion turns to agricultural income tax.
The real giant of Pakistan’s agricultural economy is livestock. The livestock sector contributes nearly sixty four percent of agricultural GDP. This translates to fifteen percent of the entire national GDP. In other words, livestock contributes three times as much to the national economy as all major crops combined. Yet this sector has received virtually no attention from tax authorities at either the federal or provincial level.
The question demands an answer. Why has no serious attention been paid to taxing the livestock sector? The numbers make clear that any meaningful effort to tax agricultural income must focus primarily on livestock rather than crops. A farmer growing wheat or cotton on a few acres may struggle to pay substantial taxes. But large commercial livestock operations represent significant economic enterprises with substantial revenues and profits. Dairy farms, cattle ranches, poultry operations and other livestock businesses often operate on an industrial scale with modern management and significant capital investment.
These enterprises should be subject to taxation commensurate with their economic contribution. A poultry farm producing millions of birds annually generates revenues comparable to medium-sized businesses in other sectors that face full corporate taxation. Yet such operations largely escape the tax net simply because they fall under the agricultural designation. The same logic applies to large dairy operations, cattle ranches and other livestock businesses.
The failure to tax livestock income represents a massive revenue opportunity lost. It also creates profound inequity. Salaried workers earning modest incomes face withholding taxes on every rupee they earn. Small businesses struggle under multiple tax obligations. Meanwhile, wealthy livestock owners accumulate untaxed profits while claiming the agricultural exemption. This inequity undermines public confidence in the tax system and makes voluntary compliance more difficult to achieve.
The provinces must begin treating commercial livestock operations as the businesses they are. Tax policy should distinguish between subsistence farming and commercial agriculture. A small farmer keeping a few animals for household consumption requires protection. A commercial operation with hundreds or thousands of animals requires taxation. Until the provinces and the federal government recognize this distinction and act on it, Pakistan’s agricultural taxation will remain fundamentally incomplete and unjust. The livestock sector cannot continue hiding behind outdated exemptions while contributing fifteen percent of national GDP. The numbers demand action. The question is whether political will exists to finally act on them.
