Taxing agricultural income is a politically sensitive matter. Considering its sensitivity, no government has dared to bring agricultural income under the scope of personal Income Tax. But the fact remains that the continued exemption of agricultural income from the scope of IT continues to be a sore point with all tax payers.

Experts feel that by keeping such a large section out, the tax base is not expanding in proportion to size, dimension and potential of the ever-growing Indian economy. Besides,  the blanket exemption of agricultural income from the purview of IT distorts both horizontal and vertical equity.

What is most disturbing is that such exemption encourages laundering of non-agricultural income as agricultural income. In other words, tax analysts say, the non inclusion of agricultural income under the purview of Income Tax has become a conduit for tax evasion.

In fact, a high-powered Task Force on Direct Taxes constituted by the Finance Ministry way back in 2002 while taking a close look at the tax returns of a large number of taxpayers in Mumbai detected that a number of taxpayers had claimed large amount of income from agricultural operations. The Task Force headed by Dr Vijay K Kelkar held “to this extent horizontal equity was distorted. Similarly, the favourable treatment of agricultural income also adversely affected vertical equity”.

The Task Force to its shock found that prima facie the claims for income from agricultural operations appeared to be doubtful to most Income Tax officers since the agricultural operations are claimed to have been carried out in areas which are known to be infertile.

Based on the sample in Mumbai, the revenue loss from laundering of the non agricultural income as agricultural income was estimated to be Rs 1,000 crore (in 2002).

Given the distortionary impact of continued exemption of agricultural income, the Task Force had recommended that a tax rental arrangement should be designed whereby states should pass a resolution under Article 252 of the Constitution authorising the Central government to impose Income Tax on agricultural income. The taxes collected by the Centre would however be assigned to the states.       

But the then NDA government could not muster political courage to implement this recommendation. 

Views differ

While those associated with trade and industry are in favour of the recommendations that propose to bring big farmers into the tax bracket, agriculturists themselves are sceptical and feel that taxing farmers will cripple agriculture that is already passing through a very difficult period. One school of thought feels that wealth from any source should be treated equally and there should be no special concession to any sector.

On the contrary, those actually involved in agriculture feel that small land holdings and high cost of inputs have made farming a non-viable proposition and the burden on the farmers will not only push the small and marginal farmers further into debt, but also force many farmers to close shop and look for alternate avenues of livelihood.
While the debate is gaining momentum, many feel that the proposal to bring agricultural income under the purview of Income Tax is unlikely to see the light of the day due to strong opposition from wide spectrum political leadership in the country.