IMF NOT PUSHING FOR CONTROVERSIAL AGRICULTURE TAX REFORMS

UNCLAS SECTION 01 OF 02 ISLAMABAD 003762 SENSITIVE SIPDIS REF: A. ISLAMABAD 03388 B. ISLAMABAD 03658 E.O. 12958: N/A TAGS: ECON ETRD EAID EFIN EINV PK SUBJECT: IMF NOT PUSHING FOR CONTROVERSIAL AGRICULTURE TAX REFORMS ¶1. (SBU) SUMMARY. Income from agriculture accounts for 21 percent of GDP and is technically subject to income tax, but actual revenue from agriculture is negligible. Much of the domestic criticism of the IMF program is the accusation that the IMF is requiring agricultural tax reform. On November 28, the IMF's Resident Representative publicly announced that the IMF does not have specific requirements for how government revenues should be increased. Business leaders hope that the IMF program will catalyze tax reform, broadening the tax base, but don't think that Parliamentarians will confront the powerful agricultural lobby. Opposition leaders warn that any agricultural tax reform will come at a heavy political cost. END SUMMARY. -------------- -------------- AGRICULTURE CONSTITUTIONALLY UNDER PROVINCIAL PURVIEW -------------- -------------- ¶2. (SBU) The Pakistani constitution places agriculture within the provincial purview. However, provincial tax collection efforts are weak, with low compliance, numerous exemptions, and special treatment regimes. Thus, although income from agriculture is currently technically subject to income tax and accounts for 21 percent of GDP, revenue from agriculture is negligible (less than USD 12.8 million in FY '08-'09). To increase revenue from agricultural income, the Federal government is considering two potential solutions. First, it might pass federal legislation that mandates that provinces collect the agriculture income tax. An alternative is to get provincial assemblies to permit the federal government to collect agricultural income taxes on behalf of the provinces and then remit the revenues back to the provinces for local expenditure. No proposal has entered the legislative process. ¶3. (SBU) Advocates of agriculture income tax reform, such as the Federal Board of Revenue (FBR),say that the proposal could provide significant revenue. In 2007, the FBR thought the agricultural income tax had the potential to generate revenue of over Rs.60 billion a year (USD 766 million at 78.3 rupees per dollar). Shatido Pirzada, Joint Director at the FBR reports that the GOP does not have reliable statistics on sectoral contributions to total income tax revenues for comparison. A progressive farmer from Bahawalpur and a former head of the Small and Medium Enterprise Development Authority (SMEDA),Iqbal Mustafa, disagrees with the estimates of revenue, saying that more than 90 percent of farmers are either landless tenants or small land owners so any minimum income exemption would severely cut revenues. To date there has not been an empirical study on the subject. (reftel A) -------------- -------------- IMF PROGRAM DOES NOT SPECIFY AGRICULTURE TAX REFORM -------------- -------------- ¶4. (SBU) On November 24, Pakistan agreed to a Stand-by Agreement (SBA) with the International Monetary Fund (IMF). The SBA documents are not yet public but the program has sparked debate on what conditions the IMF funds were made available. On November 28, the IMF's Resident Representative Paul Ross clarified comments made during a November 25 conference call by publicly stating that the SBA does not have specific requirements for how government revenues should be increased beyond improving the effectiveness of income tax collection. In particular, Ross said that the IMF did not require agricultural tax reform. De facto Finance Minister Shaukat Tareen had also made similar statements. Tareen says that the IMF only asked for improved tax enforcement and an increase in the tax to GDP ratio from 11 percent to 15 percent. (reftel B) -------------- INDUSTRIALISTS SUPPORT BROADENING TAX BASE -------------- ¶5. (SBU) Anis-ul-Haq, the Director of the All Pakistan Textile Mills Association (APTMA),said that textile mills hope agriculture taxation will not increase cotton prices, a critical input. However, he said that the textile industry would not object to ISLAMABAD 00003762 002 OF 002 taxing agriculture or real-estate as it would improve the equitability of taxes. ¶6. (SBU) According to Majyed Aziz, a leading industrialist and former president of the Karachi Chamber of Commerce and Industry (KCCI),the business community has a generally favorable opinion of the IMF program because, among other things, they expect it will catalyze tax reform. The KCCI hopes that the GOP will now tax the real-estate and agricultural sectors, but he doubts the necessary legislation to tax agriculture will be enacted. He said support from the agricultural sector is the political base of most parliamentarians, including the ruling Pakistan People's Party (PPP). -------------- STRONG OPPOSITION IN PARLIAMENT -------------- ¶7. (SBU) Ahsan Iqbal, Chief Coordinator & Information Secretary of the Pakistan Muslim League (PML-N),the most influential opposition party, criticized the proposed agriculture tax reform. He said it will not yield significant revenue but will have very adverse political ramifications. He supports increasing the general sales tax, improving tax collection, and taxing capital gains. (reftel B) PATTERSON