VZCZCXRO7540
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 
 
¶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