The Federal government is not competent to impose a tax on agricultural income whether directly or indirectly. However, as per an amendment made in section 111 through the Finance Act 2013, where a taxpayer explains the nature and source of amount credited or the investment made, money or valuable article owned or funds from which expenditure was made by way of agricultural income, such explanation shall be accepted to the extent of agricultural income worked back on the basis of agricultural income tax paid under the relevant provisions of law. The above change in federal law, prima facie, provides that the agricultural income will be taxed under the federal income tax law where provincial income tax has not been paid.
A leading tax expert Muhammad Shahid Baig said Section 111 deals with unexplained income and assets and provides that if there is any amount credited in a person's books of account, or he has made investment or is the owner of any money or valuable article or has incurred any expenditure or has concealed income and the person offers no explanation in this regard or his explanation is not satisfactory, the said amount of investment, money, article, etc. shall be included in the person's income chargeable to tax under the head Income from other sources, to the extent, it is not adequately explained.
He said the Federal Income Tax Ordinance, 2001 is meant to impose taxes on income of the persons and Part-VII of Division IV of Part IV of the said Income Tax Ordinance, 2001 deals with exemptions and tax concessions. The subsection (1) of section 41 of this ordinance specifically provides that agricultural income derived by a person shall be exempted from tax under this ordinance. Although as per related provisions of the constitution, the federal government is not competent at all to impose a tax on agricultural income as per entry No.47 of the Federal Legislative List but yet this particular section has been specifically inserted in this fiscal statute to exempt the agricultural income derived from any person.