Time for taxing farm income has arrived

Agriculture is a politically sensitive subject in India. Particularly, any talk on agriculture income tax is a taboo against the backdrop of farmers’ protests, grievances and suicides. So, it was heartening to see the Chief Economic Adviser Arvind Subramanian raising the issue last month.

The federal think tank Niti Aayog Member Bibek Debroy recently presented 12 facts on agricultural income taxation. He said, “in order to widen the tax base of personal income tax, besides removing tax exemptions, rural income including agriculture income could be taxed.”

It was suggested that including agricultural income under personal income tax net will broaden the tax base and thereby pave the way to eventually reduce the overall tax rate.

These are quite bold statements as taxation of agricultural income has been strictly off-limits for any policy makers in India. As expected, Finance Minister Arun Jaitley quickly issued a denial and stated that the government has no intention to tax agricultural income. Even Niti Aayog distanced itself from the comments made by Debroy saying that those were his 'personal' views.

Agriculture income is defined as rent or revenue from land through agriculture and from buildings on that land under Section 2(1A) of Income Tax Act. As India is primarily an agrarian economy providing employment to almost 50% of the population, the central government exempted the income generated through agricultural activities from tax liabilities under Section 10(1) of Income Tax Act of 1961 to boost the agricultural sector.

However, it needs to be mentioned that agriculture and taxation of agriculture income is a state subject. "Nothing prevents state governments from taxing agriculture income’’, said Arvind Subramanian.

Agricultural Income Tax Acts exists in several states like Assam, Bengal, Bihar, Kerala, Maharashtra, Odisha and Tamil Nadu. Uttar Pradesh which introduced Agricultural Income Tax Act in 1948 repealed it within a decade in 1957 while Karnataka repealed its Act in 2016. Moreover, different states have different tax policies. Assam levies taxes on income from tea plantation at the highest slab of 45% while its neighbouring state West Bengal does not. Similarly Kerala taxes plantations but not Tamil Nadu.

There are reasons why states shy away from taxing agricultural income. First, with large population depending on agriculture, states do not want to alienate their vote banks. The popular perception is that as 70% of the farmer households own less than one hectare of land, farmers are too poor to be considered as a tax base. We come across reports of agrarian distress on daily basis.

Moreover, it is very difficult to track agricultural income as it is largely based on cash transactions with no formal book keeping and not covered by the banking system. It is also hard to accurately assess the input expenses in terms of labour, seed, irrigation, fertiliser etc and compute the profit.

However, there is a need to bust the myth – whenever there is a discussion on agriculture income tax, nobody is taking about taxing these poor farmers. Agricultural income will be taxed above a threshold just like personal income tax. A few points need to be highlighted.

First, according to the Income-Tax Department (in response to RTI filed by retired IRS official Vijay Sharma), agricultural income and number of tax assesses have increased exponentially from 2004 to 2013. A total of 6.57 lakh assesses filed returns in 2011 with an agriculture income touching massive Rs 2,000 lakh crore - 20 times the country’s gross domestic product. This entire income was tax exempt. In the year 2014-15, around four lakh taxpayers claimed tax exemption from agriculture income.

Second, not only rich farmers, but a number of agricultural companies apply for tax exemption. In 2014-15, top 10 companies claimed Rs 628 crore as tax exemption – highest of Rs 187 crore was claimed by Kaveri Seeds followed by Rs 94 crore by Monsanto India. Basically, tax exemption has benefited only rich farmers and agriculture companies.

Third, for long, part of black money has been masquerading as agriculture income. The 2014 Tax Administration Reform Commission report states, “agricultural income of non-agriculturists is being increasingly used as a conduit to avoid tax and for laundering funds, resulting in leakage to the tune of crores in revenue annually.”

Tax non-compliant
There had been reports of crores of rupees of income from orchards with fictitious apples taken to non-functional mandis and sold to non-existent firms. The Income Tax Department is investigating farms with reported incomes of more than Rs 1 crore a year. There are 307 such cases in the assessment year 2015-16, up from 180 in the year 2007-08, with a total of 2,746 cases.

Fourth, India’s tax to GDP ratio is very low. Jaitley lamented in his budget speech that ‘we are largely a tax non-compliant society’. The Economic Survey reported that there are seven taxpayers for every 100 voters in the country and this ranks India 13th among 18 of its democratic peers in the G-20 nations.

There is a need to broaden our tax base. Introduction of GST and removing the exemptions in corporate taxes are expected to improve our tax revenues. Taxing agricultural income above a certain threshold will be the next step.

Fifth, we need to acknowledge that there are genuine problems in the agriculture sector. From smaller holdings, low productivity with no guarantee in floor price of produce, flip-flops in export policies to lack of irrigation and access to formal credit, problems that small farmers face are numerous. Taxing the agriculture income of super-rich farmers and corporates can be done without hurting the distraught farmers.

The time for the idea of taxing agriculture income has arrived. The revenues thus raised can be used for higher investment in the sector that would help the poor farmers of the country.

(The writer is a research scholar at IIFT and adviser at Policy Monks)