Presentations made at the PSSP First Annual Conference - December 13, 14, 2012 - Planning Commission, Islamabad, Pakistan

1. PSSP Working Paper
Economic Impact of Agriculture Income Tax
on Pakistan’s Economy
Shehryar Rashid
December, 2012

2. Background
• Pakistan has low tax / GDP ratio compared to neighboring
countries. In 2010, tax to GDP ratio was 10%.
• In 2010-11, fiscal deficit increased to 6.6% of GDP. Financing of
fiscal deficit has shifted towards central bank financing.
• In 2011, Government of Pakistan and Planning Commission
launched Framework for Economic Growth which aims to
achieve 7% economic growth rate in order to successfully absorb
new workers.
• Pakistan’s agriculture sector employs around 45% of workforce.
• Pakistan’s agriculture sector contributes around 21% to
Pakistan’s GDP, however contribution to tax revenue is not
comparable.

3. Background Continued
• In recent years, the price of certain agriculture
commodities has increased which has raised rural incomes.
• Income Tax Ordinance of 2001 gave exemption for tax on
income from agriculture.
• There is a need to reduce government deficit.
• Debate over increasing government revenue through
agriculture income tax.
• Opponents of agriculture income tax argue that agriculture
sector is already taxed indirectly through pricing structure.
• Supporters of agriculture income tax argue that sector
should pay fair share.

5. Sources of Tax Revenue
Contribution (%) in 2009-10
GDP Growth Tax Revenue
Agriculture 22 10 1
Industry 25 30 63
Services 53 60 26
Source: Federal Bureau of Statistics, Federal Board of Revenue

6. Purpose
• Calculate terms of trade for agriculture in
Pakistan from 2000-01 to 2009-10.
• Research effect of an imposition on
agriculture income tax on Pakistan’s economy
using CGE Model.
• Determine effect on production and income.

7. Terms of Trade Calculation Formula
• Terms of Trade compares returns to a sector
with payouts made by the sector.
• In this case Terms of Trade is comparison of
agriculture sector to industrial sector.
• Laspeyre’s formula = export price index /
import price index.
• (Base period 2000-01)

8. Terms of Trade for Agriculture in
Pakistan
Year Terms of Trade (TOT)
2000-01 100.00
2001-02 98.80
2002-03 97.34
2003-04 95.47
2004-05 95.10
2005-06 95.57
2006-07 101.03
2007-08 94.97
2008-09 99.42
2009-10 99.16
Terms of Trade is favorable if TOT > 100
Terms of Trade is unfavorable if TOT < 100

9. Description of Sam
• Base year 2007-08
• Activities 51: (Agriculture = 12, Industry = 22, and
Services = 17)
• Commodities 50: (Agriculture = 11, Industry = 21,
and Services = 18)
• Factors 27: (Labor = 10, Land = 12, and Other
Factors = 5)
• Households 18: (Rural = 15, and Urban = 3)
• Other Institutions Accounts 4

10. Households in SAM
• Household medium and large farm (Sindh,
Punjab, and other)
• Household small farm (Sindh, Punjab, and other)
• Landless farmer (Sindh, Punjab, and other)
• Waged rural landless farmer (Sindh, Punjab, and
other)
• Rural non-farm (quintile 1, quintile 2, and other)
• Urban (quintile 1, quintile 2, and other)

11. Simulations
Simulation Description
Number
1 5 percentage point increase in income tax on large -
medium farmers only
2 10 percentage point increase in income tax on large -
medium farmers only
3 5 percentage point increase in income tax on large –
medium farmers, and 5 percentage point increase in
income tax on small farmers

12. Note on simulations
• Closure: Foreign savings is fixed, real exchange
rate adjusts. Government savings fixed,
government expenditure adjusts.
• Static model
• Marginal Propensity to save is fixed

13. Impact on overall economy
Variable Simulation #1 Simulation #2 Simulation #3
Public Income 4.2% 8.5% 12.6%
Private
-0.4% -0.8% -1.1%
Consumption
Fixed Investment 1.6% 3.1% 4.4%
Real Government
-0.1% -0.2% -0.4%
Consumption
Real Exchange
Rate (positive
0.14% 0.28% 0.54%
change =
depreciation)
Exports 0.0% 0.0% 0.2%
Imports 0.0% 0.0% 0.1%
GDP 0.0% 0.0% 0.0%

14. Impact on output
Output Variable Simulation #1 Simulation #2 Simulation #3
Livestock industry 0.0% 0.0% 0.0%
Wheat 0.1% 0.1% 0.3%
Cotton 0.0% 0.0% 0.1%
Rice - irrigated 0.0% 0.0% -0.1%
Sugarcane -0.1% -0.1% -0.4%
Construction sector 1.3% 2.6% 3.7%
Manufacturing
0.2% 0.3% 0.5%
industry
Cement industry 0.9% 1.9% 2.7%
Garments industry -0.7% -1.4% -1.7%
Energy sector -0.1% -0.3% -0.3%

15. Impact on price
Price Variable Simulation #1 Simulation #2 Simulation #3
Livestock industry -0.4% -0.7% -1.0%
Wheat 0.0% 0.0% -0.3%
Cotton 0.0% 0.0% -0.2%
Rice - irrigated 0.0% 0.0% -0.1%
Sugarcane 0.0% 0.0% -0.3%
Construction
1.1% 2.2% 3.4%
sector
Manufacturing
0.7% 1.5% 2.6%
industry
Cement industry 1.5% 3.1% 4.7%
Garments industry 0.0% 0.1% 0.3%
Energy sector -0.2% -0.4% -0.1%

16. Impact on household consumption
Household Simulation 1 Simulation 2 Simulation 3
Large – medium farm -5.2% -10.3% -5.6%
owners
Small farm owners -0.05% -0.1% -5.5%
Landless farmer -0.1% -0.1% -0.1%
Waged rural landless 0.0% 0.0% 0.2%
farmer
Rural non-farm 0.1% 0.2% 0.5%
quintile 1
Rural non-farm 0.1% 0.3% 0.6%
quintile 2
Rural non-farm other 0.2% 0.3% 0.7%
Urban quintile 1 0.2% 0.4% 0.9%
Urban quintile 2 0.2% 0.5% 1.0%
Urban other 0.3% 0.6% 0.9%

17. Story
• Terms of Trade for agriculture sector in
Pakistan has improved in recent years.
• Public income increasing as a result of tax.
Investment is increasing (specifically in non-
agriculture sectors).
• Demand for labor is increasing in non-
agriculture sectors (specifically in
construction, manufacturing, and cement).
• Minimal impact on GDP.

18. Conclusion
• Terms of Trade estimates suggest that
agriculture sector is not at disadvantage. Can
think about agriculture income tax.
• Agriculture income tax not as harmful to
overall economy.
• For a country to develop, labor has to shift
from agriculture towards industry / services
sectors.

19. Policy Implications / Suggestions
• Income tax on agricultural income hurts
households producing agricultural commodities
but helps non-agriculture sectors.
• Argument in favor of income tax on agriculture in
order to increase government income and reduce
deficit.
• Government should promote policies which allow
for income tax on agriculture income for large
farm owners.

20. Thank You
Shehryar Rashid