Should India tax agricultural income?

Should India tax agricultural income?

 

What is agricultural income?

Agricultural income is defined under section 2(1A) of the Income Tax Act, 1961. According to this Section, agricultural income generally means:

(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 agriculture operations including processing of agricultural produce so as to render it fit for the market or sale of such produce.

(c) Any income attributable to a farm house subject to satisfaction of certain conditions specified in this regard in section 2(1A).

(d) Any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income.

So far, a farmer completely engaged in agricultural activities enjoys full tax exemption.

Why is agricultural income not taxed so far?

a) Levying agricultural tax is under state authority and cannot be directly implemented by the Central government.

b) For this, by laws have to be amended which may face opposition.

c) Since the sector is highly informal and unorganized, it's difficult to implement regulation mechanism for tax collections.

d) While 83% of the farming population in India is small and marginal farmers (Economic survey , 2016) implementing a uniform taxation rate would be burdensome on these farmers.

e) In continuation to point 4, implementing a basic tax slab can also be challenging since data in the sector is unavailable or unorganized.

Analysis: -

In favour of-

According to data put out by the Income Tax Department, in the nine-year period- 2006-07 to 2014-15, 2,746, income tax cases declared agricultural incomes over Rs 1 crore who have filed their return.

These farmers constitute 4% of the farmers, but earn 20% of the total agricultural income. Small and marginal farmers earn income a lot less than basic exemption limit (currently 2,50,000).

According to Tax Administration Reform Commission report, “Agricultural income of non-agriculturists is being increasingly used as a conduit to avoid tax and for laundering funds, resulting in leakage to the tonnes of crores in revenue annually."

Hence it leads to vast income disparity, with poor farmers getting no benefit of the tax relief while rich farmers exploiting the tax exemption. Using the Pareto principle, this 20%'s income should be further investigated, to set a basic exemption slab for agricultural income.

However...

This decision will have lasting economic and political implications. As per the latest census, 61.5% of the population is engaged in agriculture. Around 2500 farmers commit suicide in India every year. Hence implementing tax on agriculture will require meticulous planning, with the help of a basic tax slab for exempting income of poor farmers.

Government needs to make projections of cost benefit whether the tax collected from cream 20% farmer's income will supersede the cost incurred for implementing tax mechanism.

Also a government who implements agriculture tax will not cast a favourable image on its vote banks. This could be a factor leading to delay of implementing agricultural tax despite recommendations of economic committees.

In conclusion, a well balanced, prudent agricultural tax scheme would be favourable for the economic development of the country. Agricultural income taxed in right proportions would lead to reduction of disparity and avoidance of undue advantage of Indian tax system.

-Avanti Jog