The exemption to agricultural incomes – the true extent of which is not known in the absence of official data – is a black hole into which huge amount of incomes of non-agriculturists disappear every year. This has been officially acknowledged several times in the past five decades. The finance ministry officials, lawmakers and even academics working in the area of taxation and agriculture have known it but little has been done to correct the situation and thereby hangs a tale.
In 2002, the Kelkar Committee (Task Force on Direct Tax) had said the same thing: the exemption to agriculture income “distorts both horizontal and vertical equity” and “encourages laundering of non-agricultural income as agricultural income, i.e., it has become a conduit for tax evasion”.
What ‘agricultural income’ means?
As per section 2(1A) of the Income Tax Act of 1961: (a) any rent or revenue derived from land which is situated in India and is used for agricultural purposes (b) any income derived from such land by agricultural operations including processing of agricultural produce so as to render it fit for market or sale of such produce (c) any income attributable to a farm house subject to fulfilment of conditions specified in the Act and (d) any income derived from saplings or seedlings grown in a nursery.
Tax on agricultural income falls under the ‘state list’, meaning that only state governments can levy income tax on such incomes, not the central government(“entry 46 of the state list of the 7th schedule” of Indian Constitution).
The table below shows the amount disclosed as Agricultural income :
There is an abnormally high amount of agricultural income shown for AY 2011-12. This is 22 times of the GDP for that year. Remember, this was the time when all scams were occurring under the supervision of Mrs. Sonia Gandhi.
A study estimated the potential of revenue from agricultural income at about 1.2% of the GDP in FY08. It said the states could earn additional revenue of about 19% by taxing agricultural income.
Why tax exemption on agriculture is harmful for the economy?
- Exemption to agricultural income distorts horizontal and vertical equity – those getting exemptions are at an advantage over those earning equivalent level of income from non-agricultural activities (horizontal equity) and exemption fails to distinguish between the poor and the rich farmers (vertical equity).
- Exemption “encourages laundering of non-agricultural income as agricultural income, i.e., it has become a conduit for tax evasion”.
- A narrow tax base leads to a higher tax rate structure and burdens other tax payers.
Can agricultural income be taxed and how? What should be ideally done?
- The Central Govt. needs to put in mechanisms ensuring that people fraudulently don’t show their non agricultural income as agricultural income. For e.g. a person claiming exemption on agricultural income should be asked to furnish their land details and fix a maximum capping on the amount that can be earned per acre of land. If I have 5 acres of land, Govt. should allow say not more than INR 500000/- an year to be claimed as agricultural income(after doing the right surveys).
- State Govts. should tax the rich farmers. A salesgirl earning INR 40000/- p.m. pays taxes, why should a farmer earning hundred times more be exempted? I don’t want marginal farmers to be taxed, but rich farmers must be. Say, the state govts. impose a 10% tax for an income INR 500000 – 1000000, 20% tax for an income between INR 1000000 – 2000000, 30% for more than 2000000. This will result to more revenues to the states and reduction in taxes for all others.
- Many of the agricultural products are taxed at 0% GST slab. They should be moved to 5% GST slab. This may result to the merger of 12% and 18% GST slabs to 12%(or even a 10%) slab. Such a move will increase consumption and result to overall development of the economy. Making one object tax-free increases the taxes on other. If there is a uniformity in taxation, there will be all round development.
- Govt. should ensure the benefit of MSP and subsidies reach only poor farmers. I estimate the expenses on MSP and farm subsidies running in to several hundred billion dollars an year.
India is a welfare state, hence it is the duty of “haves” to bear some burden on “have nots”. But by not doing all what is listed here, the govt. is making a marginal businessman/salaried person bear the expense of a rich farmers. Probably this is the reason why the farm protests are occurring and why poor farmers have moved to the clutches of middlemen, hoarders and corrupt FCI officials.
I would conclude saying that we have made farmers holy cows, but by doing so the deserving farmers have remained poor and the non deserving ones have become parasites surviving on the money of hardworking businessmen, middle class and corporates.
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