[Type the document

title]
HP
[Type the abstract of the document here. The abstract is
typically a short summary of the contents of the
document. Type the abstract of the document here. The
abstract is typically a short summary of the contents of
the document.]

[Type the company name]

[Type the company address]

[Type the phone number]

[Type the fax number]

[Pick the date]

Introduction
Considered the cornerstone for Pakistan’s economy, agriculture is one of the most important
sectors in Pakistan. According to Pakistan’s Bureau of Statistics, agriculture accounts for 24
percent of Pakistan’s Gross Domestic Product (GDP), and employs 43 percent of Pakistan’s
labour force. It is worth noting that primary sector goods have contributed the most towards
the country’s import and export revenues and have, in turn, formed a larger base of taxation
income for the government.
This has made the question of tax reforms with regard to the agricultural sector of Pakistan,
more important than ever. Taking these developments into consideration, the principal
purpose of this research is to investigate which taxation practices have globally contributed
towards facilitating a greater agricultural production setup. Subsequently, this article will
explore how these aforementioned taxation practices fare in a Pakistani context in light of the
changes observed in agricultural production over the past few decades, particularly with
regard to the major agricultural crops – most notably sugar, rice, wheat and cotton.
Additionally, this research will scrutinise the relationship between the tax revenue accrued by
the agricultural sector and Pakistan’s overall GDP.
Literature Review
Background
Over the years, several debates have sparked to understand whether land revenue system or
agricultural income tax would prove beneficial for the economy.
Many recent prolific scholars have tended to lean towards the latter, claiming that although
Pakistan’s agricultural economy contributes around 23% to the national income, the tax
generated from this sector is diminutive. This is primarily because land revenue tax is price
and income inelastic in nature, which means that the rich and prosperous farmers are
accounted for less than what they could have paid in taxes otherwise.
However, one of the alarming factors to consider when discussing the agricultural situation of
the country is that farmers are already levied and over-burdened with indirect and implicit
taxes. This may also serve as one of the underlying reasons as to why there is a low
contribution of direct taxes.

Understanding Pakistan’s Agricultural Tax System

Table 1 (in appendix) presents probable scale of implicit taxes from 1995-1996 to 1997-1998.
It is evident from the data below that the support prices of the commodities were way less
than farm gate parity prices, which resulted in high implicit agriculture taxation (i.e.
approximately Rs.99 billion, Rs.90 billion and Rs.60 billion from 1995-1996 to 1997-1998.
Overall, the policy analysts posit that the one of the ideal ways to reform the agricultural tax
system of Pakistan is to combine the proportional land tax and a tax on marketed output. The
former will ensure that the tax net is broad and relatively stable than graduated land tax,
where its nature of price and income inelasticity will be compensated by levying tax on
marketed output.
Agricultural Pricing Policies in Pakistan – Between Equity and Efficiency of Taxation
This overarching overview of tax reforms through the years gives us a very broad framework
to ground the purpose of this study. The paper’s particular focus on taxation in the
agricultural sector will be studied from various perspectives similar to what has been done in
the past in many studies.
The government’s administrative and political constraints in imposition of taxes on the
agricultural sector’s income and profits are caused by the fact that many households are
producers and consumers at the same time. Hence, the government’s response is to rely on
price fixing strategies which are substantiated through imposition of indirect taxes on major
crops such as wheat, rice, sugarcane and cotton and fertilizers. The primary cause of concern
is that taxing net trades (production minus consumption) through pricing policies, leads to
households in rural areas to increase their production of commodities whose demand for
consumption is high. For instance, an increase in the price of cotton (procured by the
government or sold in the open market) may lead to households switching towards
production of more rice which has a higher proportion of consumption than production for
trade. Households will then not be required to pay tax on the latter if it is not bought by the
government or sold in the open market.
The government mostly has to venture a trade-off between equity and efficiency in its
taxation or pricing policies for the agricultural sector since the dynamics of rural households
(being both producer and consumer) creates issues in devising a more-direct income transfer
mechanism (revenue for the government). The concept of marginal social costs lies at the
heart of this issue as “those instruments which have low marginal social costs should be taxed
more”1 to increase government revenue (these include, maize, fertilizer, and cotton) as these
do not form the main consumption commodities for households. “From an efficiency
perspective increasing wheat or rice procurement prices through indirect taxation or lowering
those for cotton, sugarcane and fertilizers are the most attractive policy instruments for
government revenue.” The rationale for implementing this policy initiative is that reducing
prices for the latter will increase their production which will then be taxed heavily and will
contribute significantly towards government revenue, mostly because these commodities are
not consumed by households.
Table 2 demonstrates the proportion of major crops procured, consumed and sold on the
market illustrating the relative importance of each crop to rural households and how this can
inform government’s taxation and pricing strategies.
 Table 2: Proportion of major crops procured, consumed and sold

Investigating the Comparative Politics of Rice Production in Pakistan

A policy paper which seeks to utilise a price risk analysis method to evaluate the comparative
economics of rice in Pakistan, Mohammed F. Hussain, Sofia Anwar and Zakir Hussain
critically assess how the comparative advantage of rice undergoes changes over time and how
this impacts trade development.
Published by the European Journal of Economics, Finance and Administrative Sciences – an
internationally recognised, cross-disciplinary and peer-reviewed journal – this policy paper’s
employment of a price risk analysis, coupled with a statistical analysis makes for a
comprehensive read. The authors discuss how rice, being a cash-crop, “is one of the major
contributors to the country’s [Pakistan] GDP”. Focusing on Basmati rice (mostly grown in
Punjab) and Irri rice (mostly grown in Punjab and Sindh), this research mentions the growing
global competition with regard to rice exports and points towards how “the changing
economic situation warrants not only the assessment of the current status but also determine
the future potential of country competitiveness and comparative advantage in rice
production”2.
The findings of this research underscore how Basmati rice’s production at export parity
prices gives Pakistan a comparative advantage – with respect to the statistical analysis. Table
3 (in appendix) demonstrates how there was greater profit at economic prices rather than the
financial prices, thereby reinforcing Basmati rice’s competitiveness in the global market.
Investigating Punjab’s Revenue Potential
It was observed that from 2009-2010, the provincial government of Punjab gathered Rs.1.2
billion (Nasim, 2012. p.1) from the ‘taxes from agriculture’ and ‘agricultural income tax’
budget headings. Anjum Nasim argues that the ‘tax on agriculture’ budget heading falls under
land tax rather than income tax, with agricultural taxes amounting to 2.2 percent of the tax
revenues, and 0.22 percent of the total direct tax revenue in Pakistan. Nasim contends that
with regard to the incumbent rates of income tax, “the perception about the potential about
the agriculture income tax potential is exaggerated, but the revenue potential is still very large
relative to the actual tax collection by the provinces.” (pg.2)
Upon proposing options for agricultural taxation subject to the land area, it must be noted that
in Punjab, the land tax is distinguished with regard to cultivated and uncultivated land
irrigated and unirrigated land, farms with crops and farms with orchards, and farms of
different size categories. (pg.12) A proposal centred around the rental value of land is
explored. Another proposal focusing on the employment of presumptive income taxes (which
is essentially tailored towards crop income) is also evaluated.
Historically speaking, land administration system and provincial land tax has been employed
in Pakistan since 1947. Pointing towards the shortcomings in the effectiveness of the tax
administration, Nasim also discusses strong political influence as an important factor which
has restricted the growth of revenue from agricultural incomes. (pg.26) Establishing a
carefully designed agricultural income tax can alleviate the dismal amount in revenue
collection by paving way for a substantial increase in revenue generated.

Methods
The primary focus of this research is to gauge a foundational understanding of taxation
practices in the agricultural sector of Pakistan compared with countries that have a big
agricultural setup. To this effort the United States and Bangladesh have been chosen to
compare the differences and/or similarities in taxation practices in the sector and the overall
impact agriculture has on the economy, in terms of contribution to Gross Domestic Product
(GDP), employment and growth of the sector itself. The study is based on secondary datasets
acquired from the World Bank (1960-2018) to conduct this comparative analysis.
Furthermore, official data from the Pakistan government (annual federal budgets and Pakistan
Economic surveys across various years), and data from the United States Department of
Agriculture Economic Research Service have been used to analyse and present the income
generated from direct taxation in the sector and the subsidies provided in terms of currency
value.
Since this study aims to present a foundational understanding of taxation in the agricultural
sector, the methods chosen to analyse the data mostly pertain to descriptive statistics,
including mean, median, standard deviation and variance. Statistical inferences will be made
using these methods to compare and contrast the different impact agriculture has on the
economies of Pakistan, the United States and Bangladesh. Since taxation is a very complex
area of study and requires extensive computational skills and know-how of a wide array of
policies, the authors believe that in order to conduct a preliminary discussion on the research
topic it is important to restrict the quantitative analysis to descriptive statistics to engage a
wider audience and ensure that the findings and analysis of the study are easily accessible.
Supported by the literature which supports the claim that even though there is a huge
agricultural setup, the tax structure is not adequate for the sector, the study’s hypothesis is as
follows:
Despite agriculture's importance for the economy, the current taxation practices are
insufficient both in terms of value and as a percentage of overall taxes.
The next section will analyse the findings derived from the datasets to prove this hypothesis.
Results and Discussion
This section focuses on presenting the findings using three unit analysis substantiating
agriculture’s impact on the economy in general, the practices of taxation and price fixing on
major crops and lastly the composition or contribution of taxation from the agricultural sector
towards the overall economy. In the first case, comparisons are made between Pakistan, USA
and Bangladesh, while in the third unit of analysis a comparative analysis between Pakistan
and USA’s agricultural tax mechanisms will be conducted to assess the impact of the sector.
Figure 1 below shows the contribution of agriculture to the GDP of the three countries
mentioned. It can be assessed that Pakistan and Bangladesh have experienced a reduction in
the contribution of the sector towards the economy despite being largely agrarian economies
with their respective percentage contributions in 2018 standing at 22.5% and 13.07%. The
United States on the other hand, has maintained a steady position in this regard. It is
important to stress that out of the three countries Pakistan’s agricultural sector contributes
most towards GDP and thus has important implications for taxation in the sector.

% of GDP: Gross Value added by Agriculutural

sector
80
60
% of GDP

Pakistan
40
Bangladesh
20
USA
0
1960

1981

2002
1963
1966
1969
1972
1975
1978

1984
1987
1990
1993
1996
1999

2005
2008
2011
2014
2017

Figure 1 Percentage contribution of agriculture to GDP

Source: World Bank Data

% Contribution of Agriculture to GDP

Mean Median St. Dev Variance

Pakistan 27.38 24.89 6.01 36.17
Bangladesh 34.23 31.05 16.2 262.33
USA 1.11 1.13 0.12 0.01
Table 4 Descriptive Statistics on % contribution of agriculture to GDP
Source: World Bank Data

In relation to economic indicators, employment in the sector also exemplifies its importance
for the economy. Figure 2 below illustrates the trend line for the composition of employment
in the sector as a percentage of the total employment in the three countries. Here too Pakistan
leads the chart with the latest figure of 41.3% (2018) of the labour force employed in the
sector. Similar to the previous figure, Bangladesh has experienced a continuous fall in the
employment level in the sector, whereas the USA has maintained its employment levels over
the years.
 Employment in agriculture (% of total
Employment in agriculture sector
80
70
employment) 60
50
40
30
20
10
0
19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
Year
Pakistan 44 44 44 43 43 43 43 43 43 43 43 42 42 43 43 43 44 45 43 43 43 43 42 42 41 42 42 42 41
Bangladesh 70 69 68 67 66 65 65 65 65 65 62 60 57 54 51 48 48 48 48 47 47 46 45 44 43 43 41 40 40
USA 3 3 3 3 3 3 3 3 2 2 2 2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

Figure 2 Employment in agriculture sector as a % of total employment

Source: World Bank Data

Mean Median St.Dev variance

Pakistan 42.85 42.96 0.81 0.65

USA 1.81 1.85 0.59 0.35
Bangladesh 54.32 51.29 10.64 106.94
Table 5 Descriptive statistics for employment in agriculture sector
Source: World Bank Data

The agriculture sector’s importance for the economy can also be assessed from the
percentage growth experienced by it over the years. Although the latest figures available at
the World Bank dataset of 2017 shows Bangladesh’s growth at one per cent higher than
Pakistan, nevertheless, Pakistan’s 3.81 per cent growth which was higher than anticipated
alludes to the fact that the sector is not crucial to the economy but that its growth warrants an
investigation into how financially rewarding it is for the government as a means of revenue.
Figure 3 below shows the changes in percentage growth experienced by the sector for the
three countries. It is interesting to note that despite USA’s other indicators’ stability its
growth rates in the sector have fluctuated vastly over the years, especially in recent years
when it has experienced negative growth. Bangladesh and Pakistan on the other have
maintained stability in recent years, with Pakistan having the highest average growth rate of
3.54% shown in Table 6.
 Annual % growth in Agriculture
20

15

10

5
Pakistan
% Growth

0 1978 Bangladesh
1960
1963
1966
1969
1972
1975

1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
USA
-5

-10

-15

-20

Figure 3 Annual percentage Growth in Agriculture

Source: World Bank Data

Annual % growth Mean median st dev variance

Pakistan 3.54 3.84 3.49 12.17
USA 2.67 3.16 3.82 14.59
Bangladesh 2.48 1.91 8.5 72.27
Table 6 Descriptive statistics for Annual % growth
Source: World Bank Data
Appendix
Table 1

Table 3
 Revenue Production costs Profit
Tradeable Non- NPI= 0.90
tradeable
Private prices 8870.95 3255.28 4497.89 1117.79 NPC= 1.41
Social prices 6304.21 3620.41 4571.86 -1888.05 EPC= 2.09
Divergence 2566.74 -365.13 -73.97 3005.84 DRC= 1.70
Value added 2683.81
Value added/acre inch of 45.49
water

Table 3: Policy Analysis Matrix for IRRI Paddy in Pakistan.

Source: Agriculture Price Commission, Ministry of Food,
Agriculture and Livestock.
Unit Value in Pakistan Rupees.