Taxing Agricultural Income In India
Recently, The NITI Ayog has suggested the government that it should put efforts to tax the agricultural income in the country. This is a very sensitive issue. We have tried to explore and analyse it in every possible angle.
NITI Aayog has suggested that agriculture income should be brought under the purview of personal Income Tax in a bid to curb tax evasion.
During the discussion at the Governing Council meeting, the Aayog said that non-agricultural entities sometimes are used as a blanket relief to evade taxes.
At present, all agricultural income is exempted from Income Tax irrespective of its size. The main purpose of the provision is to protect farmers, but sometimes it is used by non-agricultural entities to evade taxes by declaring agriculture as the source of their income. So plugging of these loopholes would mitigate the generation of black money. And it can be done by meticulously taxing the agriculture income.
For instance, in the assessment year 2014-15, nine of the top 10 claimants for tax exemption of agricultural income were corporations; the 10th was a state government department.
Apart from it, numerous irregularities were found in agricultural income in 2011-12 and 2012-13. So it becomes important to think about taxing agricultural income.
Why to Tax Agriculture?
The data released by the RBI shows that there were about 225 million households in India of which roughly 66 percent were in rural India. But rural India is clearly out of the purview of all personal income taxation. But ideally there should be no artificial distinction of rural and urban, so whatever is the parameter on personal Income Tax on urban side, must be same on rural side.
The Aayog has also planned to reduce fiscal deficit to 3% of the GDP by 2018-19 and the revenue deficit to 0.9% of the GDP by 2019-20.
Taxing agricultural income should be just like any other economic activity: if individuals and companies can be taxed, so should farmers, provided they go beyond the exemption limit.
All other reasons given in support of not taxing farmers are more emotion-based. Mostly they argue that the majority would be classified as socially and economically deprived. But, this argument can be given for other sections too which are being taxed, especially at the lower-income level.
It is very important to be realized that if agriculture has to be taxed, it would be done by the States as our federal structure would not permit the Centre to do so.
To identify eligible individuals for taxation is a major problem because many of them own small pieces of land or are landless laborers.
The latest data on tax collections reveals that of the 42 million-odd people in the organized sector around 17 million are salaried and pay taxes.
And there are 56 million workers in the unorganized sector and 18 million pay taxes. Particularly in the case of agriculture, there is around 120 million potential assesses it will be difficult to identify them.
History of Tax reforms in Agriculture in India
In 1925, the Indian taxation inquiry committee observed that there is no historical or theoretical justification for the continued exemption from the income tax of income derived from agriculture. There are, however, administrative and political objections to the removal of the exemption at the present time. Almost a century later, both parts of that observation still hold true.
In India, six states presently have agricultural tax legislation on the books. They are Kerala, Tamil Nadu, Assam, Bihar, West Bengal and Odisha. But the implementation varies substantially, from taxes not being levied at all to being levied only upon income from plantations.
A number of other states such as Rajasthan and Uttar Pradesh have reversed their policies on the issue over the decades, introducing and then rolling back agricultural tax.
The reform attempts go as far back as 1947. Then the report of the expert committee on financial provisions to the Constituent Assembly advised consulting with the states to address the issue quickly.
In 1972, the Raj committee on taxation of agricultural wealth and income gave its report which is considered perhaps the most comprehensive report on agricultural taxation.
In 2002, the Vijay Kelkar committee had also addressed the issue, noting that states should be persuaded to pass a resolution authorizing the Centre to pass a tax on agricultural income that would then be assigned to the respective states.
In present, Prime Minister Narendra Modi’s conference with tax administrators in June 2016 is the latest attempt in this line, when tax administrators brought up the issue of taxing agricultural income.
How to Implement
The implementation of the taxation on agricultural income will demand something out of the box. Theoretically, in the case of large farmers parameters for exemption can be decided for specific crops.
For this, an assumed cost of production would be required to set which goes into a unit of the produce and can be extrapolated to the proper level of income which merits a tax.
The government will have to make the use of biometric impressions for all sale transactions in the mandi and data can be recorded and aggregated leading to subsequent taxation beyond the limit.
In this case, it is likely that proxy impressions will creep in so mandatory registration of farmers at mandis will be helpful.
Once the National Agricultural Market attains a reasonable level in India, then tracking such persons with large transactions becomes easier, and tax can be imposed at source.
In the developed countries farming is done in an organized way so it becomes easy to tax agricultural income. But in developing countries, farming is very unorganized, the information systems are not satisfactory and even crop estimates are based more on satellite imaging combined with arrivals which do not give the full picture.
Apart from it, the sellers in mandis are mostly not the farmers as the crop goes through an irregular network of intermediaries before entering the market. This makes identification of the farmer difficult as the intermediary would be the ‘face’, who could be paying tax even today.
So it can be said that agricultural taxation in India is a definitely politically sensitive issue with several vested interests involved. The Government will have to be bold enough to operate the National Agricultural Market which breaks the traditional stronghold.
When it would be accomplished then the next step would be to start reforms in the direction of taxes so as to bring about greater accountability in the system while plugging the lacuna.
It is clear that the government is willing to treat agriculture on a par with other sectors. But the government must also show equal care and urgency in addressing the structural issues facing the agricultural sector. One of these cares is reform the broken agricultural supply chain that still puts farmers at the mercy of middlemen cartels.
Such reforms are significant if the government wants to make farming a sustainable enterprise in the long run. Otherwise, tax on high-income farmers will result only in taking resources away from agriculture into other sectors.
And without creating opportunities for poorer farmers who are stuck in agriculture, their problems would remain unsolved. In this context, the historical transition of labor and other resources from agriculture into other sectors is especially important to keep in mind.
The rate of such transition has been very slow in India. The data show that the size of the farm workforce increased by 28.9 million between 2001 and 2011. This increase happened due to a combination of factors. Among the other reasons, this is an important reason that the difficulty agricultural workers face in finding jobs in other more advanced sectors. So, policymakers are expected to tread carefully as they move forward on a long overdue fiscal and tax reform in the agriculture sector.