Should Agriculture Income be Taxed?


    Should Agriculture Income be Taxed?

    Syllabus: GS2/ Government Policies & Interventions, GS3/Indian Economy & Related Issues, Agriculture


    • Recently, the debates were floated around exemptions and non-taxation of agricultural income in India.

    History of agricultural taxation

    • 1860: The history of agricultural tax can be traced back to 1860. 
      • It applied to income from all sources including agricultural income even when it was under high taxation by land revenue. 
      • It was active for 5 years and then repealed. 
    • 1886: It was imposed again in 1886 but this time agricultural tax was excluded and the exclusion has stayed ever since.  
      • The reason for its exemption was that agriculture was already subject to a major tax in the form of land revenue. 
    • The Indian Taxation enquiry committee, 1925: The Indian Taxation enquiry committee made a concerted attempt in  1925 to bring agricultural tax into the framework of income tax. 
      • It observed that, “There is  no historical or theoretical justification for the continued exemption from the income tax of income derived from agriculture.
    • Government of India Act, 1935: In 1935, the Government of India Act took away the central government’s power to impose tax on agriculture and gave it to the provincial governments.

    Constitutional protection from taxing agricultural income

    • Taxing income other than agricultural income: 
      • The Indian Constitution in its seventh schedule, which defines and specifies the allocation of powers and functions between the union and the states, in its union list in entry 82 gives power to the centre to levy taxes on income other than agricultural income.  
    • Power to states:
      • In the seventh schedule, under the state list, the constitution gives powers to states to levy taxes on agricultural income. 
        • So, whether agricultural income should be taxed or not is for state governments to decide.
      • Presently, only a few states have agricultural tax legislation. 
        • They are Kerala, Tamil  Nadu, Assam, Bihar, West Bengal and Odisha. But the implementation varies substantially
        • While staple food grains were spared, horticulture/plantations in some States continue to be taxed as these are seen as commercial crops.
    • Income Tax Act:
      • Agriculture is exempt from income tax under Section 2(1A) of the Income Tax Act.

    Significance of not taxing agricultural income

    • Burdening poorer: The income of small and marginal farmers is very low, they can hardly earn a living and thus are left with either no savings or a very small amount. 
      • The average per month income of a farm household in India in 2012-13 as per the National Sample Survey Office was just ₹6,491. The income-expenditure gap for a majority of farmers is in the negative.
    • No revenue potential: Around 95% of the total assets are owned by small and marginal farmers which means only 5% of the farmers will be liable to pay the tax. 
      • Therefore, it will not have major revenue potential. So, the tax income would be very limited and it is not worth consideration.
    • Reduction in credits: If agricultural tax is imposed on farmers, it will reduce their chances of getting significant credits and it will lead to credit flowing only to rich farmers, as they’ll have a higher income to show.
    • Lack of documentation & book records: The small farmers are usually illiterate and uninformed and thus they are unaware of the procedure to make proper documentation of their land. 
      • Also, they do not maintain systematic books of accounts regarding their production and income.
    • Fluctuation of incomes: There is a large fluctuation in the annual income of farmers. Harvests are unpredictable as they are affected by weather, disease and pests.
    • May increase suicide rates of farmers: With so many farmers committing suicide because of pending debts, low productivity and small income, imposing agriculture tax may even increase the suicide rate. 

    Issues & challenges

    • Growth not reflecting in expanding the tax base:   If we look at the growth of agriculture in the post-reform period, the relative contribution of agricultural income to India’s gross domestic product has shrunk at an alarming rate.
      • It has also been noted that there is an elevation in the overall condition of farmers in India. It is definitely not as bad as it was in 1886.
    • Laundering of non-agricultural income: For the last 70 years, agricultural income has been used as a method to turn black capital into white currency. 
      • The “agricultural income” path is misused by most politicians and the citizens sponsored by these politicians to turn their black capital into white money.
      • According to CAG reports, the laundering of non-agricultural income as agricultural income and consequent evasion and litigation is not only done by individual farmers but also by the corporate sector. 
        • Income from other sources is usually shown as agricultural income and thus evasion is easy.
    • Fraud “farmer” certificates: There is also a significant lack of credibility about the way states issue “farmer” certificates. 
    • Recommended by several committees: Post-Independence, several committees have recommended taxation of agricultural income:
      • Report of the Taxation Enquiry Commission (1953–54), Raj Committee on Taxation of Agricultural Wealth and Income (1972), Fourth Five-Year Plan (1969–74), Report of Fifth Finance Commission (1969), Tax Reforms Committee (1991), Kelkar Task Force on Direct Taxes (2002), White Paper on Black Money (2012) and Tax Administration Reform Commission (2014).
    • Affecting vote bank: The farmers constitute a major proportion of the country’s population and thus they form a major political group. The introduction of the agricultural tax may clearly affect the vote bank.
      • It is obvious that no government would want to upset such a large population and end their chances of remaining in power.

    Way Ahead

    • Income taxes must be paid if one’s income is above a threshold, irrespective of whether one is a farmer. The poor should be exempted, regardless of whether they are in agriculture.
    • The decision to implement the agricultural tax in India will be a tough one.
    • The underlying argument in the current discussion is to bring more people under the tax net to expand the tax base and also curb tax evasion.

    Daily Mains Question

    [Q] What is the significance of exempting agriculture from taxation in India? What are the constitutional provisions directing exemption? Discuss issues & challenges of exempting agriculture from taxation.