Domestic Terms of Trade in Pakistan : Implications for Agricultural Pricing and Taxation Policies

In 2008 the Government of Pakistan
agreed with the International Monetary Fund (IMF) to
increase the tax/Gross Domestic Product (GDP) ratio by 3.5
percentage points over the medium term. This commitment has
rekindled the debate regarding the agricultural income tax.
Advocates of an agricultural income tax argue that the
sector remains protected by political interests, while
opponents to such a tax maintain that agriculture is already
subject to significant indirect taxation, mainly because of
prevailing price distortions in agricultural product
markets. This paper reviews the literature on domestic terms
of trade analysis in Pakistan and calculates an updated set
of terms of trade indices for agriculture relative to
industry. The paper also discusses key issues with regard
to the imposition of agricultural income tax in Pakistan,
and uses simulation results from a Computable General
Equilibrium (CGE) model for the Pakistan economy to analyze
the potential effects of the imposition of an agricultural
income tax on poverty and fiscal revenues. The results
suggest that the domestic terms of trade have remained
unfavorable for Pakistan's agriculture during almost
the entire 2000-2009 period. Agriculture's terms of
trade declined from 2001-02 to 2003-04 before improving only
slightly during the period from 2004-05 to 2006-07. As of
2007 however, prices of agricultural commodities started
rising resulting in significant increases in
agriculture's terms of trade. But in spite of the
substantial increases in agricultural prices, the terms of
trade for agriculture, though on a rising trend, remained
marginally unfavorable to the sector.