Identifier
Created
Classification
Origin
08ISLAMABAD3762
2008-12-03 13:50:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Islamabad
Cable title:  

IMF NOT PUSHING FOR CONTROVERSIAL AGRICULTURE TAX REFORMS

Tags:  ECON ETRD EAID EFIN EINV PK 
pdf how-to read a cable
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RR RUEHLH RUEHPW
DE RUEHIL #3762/01 3381350
ZNR UUUUU ZZH
R 031350Z DEC 08
FM AMEMBASSY ISLAMABAD
TO RUEHC/SECSTATE WASHDC 0502
INFO RUEHRC/DEPT OF AGRICULTURE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUEHRC/USDA FAS WASHDC 4286
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUMICEA/USCENTCOM INTEL CEN MACDILL AFB FL
RHMFISS/CDR USCENTCOM MACDILL AFB FL
RUEKJCS/SECDEF WASHINGTON DC
RUEHKP/AMCONSUL KARACHI 0723
RUEHLH/AMCONSUL LAHORE 6454
RUEHPW/AMCONSUL PESHAWAR 5313
RUEHNE/AMEMBASSY NEW DELHI 4129
RUEHBUL/AMEMBASSY KABUL 9505
RUEHKT/AMEMBASSY KATHMANDU 9318
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

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.

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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