A recent proposition of the Niti Aayog for taxing agricultural income has generated public discourse. Emphatic articulation by B Mahtab and Saugata Roy during discussion on the Finance Bill in the Lok Sabha has further armoured this debate. India has not taxed agricultural income since independence for the modest reason that taxing farmers has been always seen as a trademark of colonial oppression.
There have been administrative and political objections to the removal of this exemption. An Indian taxation enquiry committee noted in 1925, “there is no historical or theoretical justification for the continued exemption from the income tax of income derived from agriculture.”
Later, the report of the Taxation Enquiry Commission (1953-54), the Raj Committee Report on Taxation of Agricultural Wealth and Income (1972), the Fourth Five Year Plan (1969-74) document, the report of the Fifth Finance Commission (1969), the Vijay Kelkar Task Force on direct taxes also stated that not taxing agricultural income violates horizontal and vertical equity, encourages laundering of non-agricultural income as agricultural income and that it has become a conduit for tax evasion. These arguments are empirically verifiable.
Roughly 90% of agricultural land is cultivated by marginal farmers who do not file any income tax returns and barely 2% of assessees declare their agricultural income. However, this microscopic fraction of farmers has declared agricultural income worth trillions. The RTI enquiries from the Directorate of Income Tax (May 2015) have revealed mind-boggling information on how some people valeted their secret incomes through the agricultural income route without paying taxes. If these incomes are brought into the tax net, it would be about six times of our GDP.
More than four lakh taxpayers have claimed exemption from agricultural income. The Third Tax Administration Reform Commission (TARC) has reported that “many rich farmers, who earn more than the salaried employees in the cities, get away with paying no tax at all in view of the government’s lack of will to impose tax on their agriculture income.”
A rigid dichotomy exists between agricultural income and other incomes in favour of the state. Section 2(1A) of the Income Tax Act defines agricultural income and in the same disposition, Section 10(1) of the Act exempts agricultural income. However, being a state subject, nothing prevents the state from taxing agricultural income.
States may also pass a resolution under Article 252 of the Constitution empowering the Centre to impose tax on agricultural income, and all such taxes collected, could be transferred to the states. While taxing agricultural income is a vastly political issue, it is also highly contested in various courts of the country due to the diversity of the meanings attached to the word “agriculture.” In fact, many economists believe that tax potentiality of agriculture has been under-exploited.
Non-compliance
Union Finance Minister Arun Jaitley remarked at the Vibrant Gujarat Global Summit 2017 that “we are substantially, in terms of taxation, a non-compliance society.” The narrowness of our tax base is realised by government data. According to it, taxpayers account for just about 1% of the population — about 1.25 crore people out of 123 crore — in the 2013 assessment year. Taxing rich farmers would give a right signal that all earners are equal in the eyes of the law, and must share the national burden of paying taxes. But the question is —which government will dare impose taxes even on the rich farmers?
This clearly means that a major reform in the income tax structure, with 85% of the economy outside the tax net, is purported to lower the income tax burden of those paying taxes. The genuine farmers or those cultivating less than, say, 10 acres (it could be higher for unirrigated holdings) will thus have nothing to fear if agricultural incomes are brought under the tax net. According to experts, given the degree of uncertainty on agriculture production and distress conditions, instead of using annual income as a threshold for levying tax, an average income of a three-year or a five-year period could be used to calculate the tax.
The voices of disapproval to the taxing of farm income are mostly coming from politicians, Bollywood stars, stockbrokers and other assorted high net-worth individuals, who clearly don’t need agriculture to sustain. For many, section 10(1) of the Income Tax Act is an easing provision for tax avoidance. The political class is deliberately avoiding the issue dreading that they would be branded as anti-farmer. In a nation where tax compliance is treated as not the rule but an exception, there is an urgent need to increase tax collections by including more classes of people who are out of the tax net.
Taxing subsistence farmers cannot be even considered or proposed given the level of rural distress in India. The policymakers need to show care in addressing rural distress that includes bringing forth much-needed reforms in this sector. At the same time, the tax proceeds of this sector should be utilised in the development of the sector like enhancing productivity, improving farm infrastructure and earnings of the agriculturists.
This will ensure that agriculturists reap better fruits for their labour and the government earns more revenue because of higher production. A real bold and dynamic approach is now needed whereby all the political parties and chief ministers organise a conclave to debate and discuss the issues concerning taxation of agricultural income. The discussion should be held primarily regarding the national outlook and not personal gain or otherwise to a political party.
Singh is associate professor of law at NLU, Odisha, and Panigrahi is an advocate, Supreme Court