Is It Time To Impose Tax On Agricultural Income?

27th March, 2024 - 9:54 am Categories: TAX 0 Comments

Introduction

The exemption of tax on agricultural income dates back to the colonial era when the British, acknowledging the critical role of agriculture in India, chose to exempt agricultural income from taxation. The Constitution of India, under “Entry 46 of the State List (List II)[1]”, “empowers state governments to levy and collect taxes on agricultural income”. The Constitution of India grants the exclusive power to tax agricultural income to state governments. Therefore, in “section 10(1) of the Income Tax Act, 1961[2], agricultural income earned by the taxpayer in India is exempt from income tax.” The definition of agricultural income is specific and pertains to income derived from agricultural activities, such as the cultivation of crops, livestock, or the sale of agricultural produce. Therefore, certain types of income related to agriculture may not qualify for this exemption. For example, Income from allied agricultural activities, such as poultry farming, dairy farming, and pisciculture, is not considered to be agricultural income and is therefore taxable. Since agricultural income is exempt from income tax, individuals engaged in agriculture are usually not required to file income tax returns unless their total income, including non-agricultural sources, exceeds the basic exemption limit.

While there are no specific reports solely dedicated to the rationale behind the exemption, various government documents and reports justify this exemption:

• Economic Survey of India: This annual report by the Ministry of Finance often discusses the impact of agricultural income exemption on the agricultural sector and rural development.[3]
• Reports by the Committee on Direct Taxes (CDT): These reports, issued periodically by the Ministry of Finance, sometimes address the issue of agricultural income taxation and its implications.[4]

Issue Challenged

1. Why tax should be imposed on agricultural income?
2. How to navigate the complexities while implementing tax on agricultural income?

Why Taxing Agricultural Income Is Essential For Equity And Financial Progress Of India?

One basic aspect of my argument for favour of tax on agricultural income is- the Principle of Equity. In a nation where all income streams shoulder the tax burden, exempting agricultural income creates a discordance. This exemption fosters horizontal inequality, where individuals with similar earnings face differing tax obligations based on the source of their income. The revenue generated could become the lifeblood for investments in education, healthcare, infrastructure, and public goods that benefit the entire nation.

Drawing insights from the histories of industrialized nations like Japan, China, and the Soviet Union, taxing agricultural income could serve as the catalyst for mobilizing resources, propelling India’s journey toward industrialization and economic diversification[5].

Some Benefits of Tax on Agricultural Income Include-

1). GDP Growth- Taxing agricultural income in India holds implications for both economic growth and farmer welfare. The diminishing relative contribution of agricultural income to India’s GDP suggests a stagnation in the agricultural sector compared to other industries. However, it’s worth noting that farmers’ overall conditions have improved since the late 19th century when agricultural income was initially exempted from taxation.[6]

A study conducted by the “National Institute of Public Finance and Policy (NIPFP)”, the finance ministry’s research body, in 2012[7], offered insights into the potential of revenue from taxing agricultural income. According to the study, “the estimated revenue potential from agricultural income was approximately 1.2% of the GDP in FY08 or 9% of the agricultural GDP for that year. Additionally, it suggested that states could generate an additional revenue of around 19% by implementing taxation on agricultural income.”

2). To Avoid Tax-Evasion- The current exemption has inadvertently become a loophole for tax avoidance strategies. Wealthy individuals exploit this loophole, evading taxes on their non-agricultural income.  Numerous official reports have underscored the misuse of agricultural income tax exemption over decades.

Highlighting the misuse, the “Raj Committee on Taxation of Agricultural Wealth and Income in 1972[8]” noted the exemption’s role in laundering black money. The Law Commission of India in 1972 also pointed out deficiencies in the income tax system due to evasion of income tax by assesses.

More recent reports, like the CAG report of 2019[9] highlighted various discrepancies, such as inadequate verification in granting exemptions, absence of essential documents, and computation errors. It recommended tightening the system to prevent misuse and black money infiltration. The studies revealed disparities, such as corporations earning substantial profits receiving exemptions, and a large number of individuals declaring agricultural income being exempted from tax. Extract from CAG’s audit 2019 is shown below:

In response, the Public Accounts Committee in April 2022[10] stressed the need for strict compliance with verification procedures by the Income Tax Department. It recommended individual checks for cases with agricultural income claims above Rs. 10 lakhs, citing a shortage of manpower as a challenge. The committee proposed a categorization mechanism to target high-risk evasion cases.

3.Enhancing Financial Inclusion of Farmers: Taxing agricultural income can significantly enhance access to finance for a substantial portion of farmers. Verified income tax returns serve as a credible signal of a farmer’s earnings potential. This verifiable data aids in distinguishing conscientious and productive farmers from those who may not operate with integrity or may have lower productivity. This differentiation is invaluable as it not only facilitates access to finance but also influences the cost of credit borne by farmers.

4. Formal Lending: Taxing agricultural income formalizes this sector of the economy, making farmers eligible for formal lending. As agricultural income enters the formal economy, banks are more inclined to provide farmers with increased credit access. This shift away from informal lending sources, such as moneylenders who often impose high interest rates, helps prevent farmers from falling into debt traps.[11]

Author’s Suggestion for Implementing Tax on Agricultural Income:

Addressing the issue of taxing agricultural income in India requires careful consideration of various factors. To navigate this complexity, policymakers can look for following suggestions:

1. Threshold-Based Taxation: Income tax is applied when one’s income is- “above a threshold”, and same concept should be applied in agricultural sector. This approach would ensure that taxation applies primarily to those with higher incomes in the agricultural sector, while exempting smaller farmers. It’s crucial to find a middle ground between expanding the tax base and safeguarding the economic interests of small and marginal farmers. [12]
2. Transparent Certification: Ensure transparency and accountability in the issuance of “farmer” certificates to mitigate misuse and tax evasion. Establishing clear guidelines and monitoring mechanisms can help maintain integrity in the certification process.
3. Policy Evaluation: Regular evaluations of tax policies concerning farmers’ welfare, economic expansion, and revenue are crucial for making informed policy modifications based on data.
4. Public Awareness: Foster awareness among farmers about potential changes in tax policies and their implications. Educating farmers about taxation reforms will empower them to engage meaningfully in the decision-making process and advocate for their interests. Without proper consultancy and counselling before passing these laws can lead to distress and confusion among public. One of the aspects of the ongoing farmer protest in India is the lack of proper consultancy before implementing the reforms.

Conclusion

The exemption of agricultural income breeds horizontal inequality, as individuals with similar earnings are taxed differently based on the source of their income. Moreover, it is misused by individuals and corporations as a tax-evasion strategy. Progressive taxation on agricultural land or revenue could help in increasing nation’s revenue and cause development in different wellness fields like healthcare and education.

Looking back at the paths taken by industrialized nations like Japan, China, and the Soviet Union, taxing agricultural income could catalyse India’s journey towards industrialization and economic diversification. Verified income tax returns not only validate farmers’ earnings but also provide access to financial opportunities, empowering them to invest in their farms and enhance productivity. Taxing agricultural income could also trigger a significant shift in farmer representation dynamics, and enabling their active participation in policy debates. To Address the issue of taxing agricultural income in India requires careful consideration of various factors like threshold-based taxation, transparent certification, policy evaluation and public awareness.

Author: NANCY KHURANA, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

REFERENCES

1. Chang, J. J.,Chen, B. L., & Hsu, M. (2006). Agricultural productivity and economic growth: Role of tax revenues and infrastructures. Southern Economic Journal, 72(4), 891-914.
2. Committee on Direct Taxes (CDT), Ministry of Finance, Government of India. (Year). Report of the Committee on Direct Taxes. accessed on March 5, 2024.
3. (2019) Report of the Comptroller and Auditor General of India for the year ended March 2018. rep., pp. 69–94.
4. Hicks, U. K. (1976). Taxing Agriculture in Developing Countries.
5. Income Tax Act, 1961, § 10(1).
6. Kumar, S. (2020). Agrarian Crisis and Framers Issues in India. From Indebtedness to Suicide. Agrarian Crisis and Farmers Suicide in India. The Voice Unheard; Best Publishing House: New Delhi, India, 125-154.
7. Ministry of Finance, Government of India. (2024). Economic Survey of India. accessed on March 5, 2024.
8. National Institute of Public Finance and policy (no date) Working Papers, National Institute of Public Finance and Policy | IDEAS/RePEc. Available at: https://ideas.repec.org/s/npf/wpaper.html (Accessed: 04 March 2024).
9. Report of the Committee on Taxation of Agricultural Wealth and income (no date) INDIAN CULTURE. Available at: https://indianculture.gov.in/reports-proceedings/report-committee-taxation-agricultural-wealth-and-income (Accessed: 04 March 2024).
10. Trumboo, N. (2022). Agricultural Income Tax in India: Introducing Threshold-Based Tax Exemption. Indian Journal of Public Administration, 68(1), 21-33.
11. Assessments relating to agricultural income. Available at: http://www.indiaenvironmentportal.org.in/files/file/assessments relating to agricultural income.pdf (Accessed: 04 March 2024).

[1] Constitution of India, Art. 246(1), Sch. VII, List II, Entry 46

^[2] Income Tax Act, 1961, § 10(1)

^[3] Ministry of Finance, Government of India. (2024). Economic Survey of India. accessed on [March 5, 2024].

^[4] Committee on Direct Taxes (CDT), Ministry of Finance, Government of India. (Year). Report of the Committee on Direct Taxes. accessed on [March 5, 2024].

[5] Hicks, U. K. (1976). Taxing Agriculture in Developing Countries.

[6] Chang, J. J., Chen, B. L., & Hsu, M. (2006). Agricultural productivity and economic growth: Role of tax revenues and infrastructures. Southern Economic Journal, 72(4), 891-914.

[7] National Institute of Public Finance and policy (no date) Working Papers, National Institute of Public Finance and Policy | IDEAS/RePEc. Available at: https://ideas.repec.org/s/npf/wpaper.html (Accessed: 04 March 2024).

^[8] Report of the Committee on Taxation of Agricultural Wealth and income (no date) INDIAN CULTURE. Available at: https://indianculture.gov.in/reports-proceedings/report-committee-taxation-agricultural-wealth-and-income (Accessed: 04 March 2024).

[9] (2019) Report of the Comptroller and Auditor General of India for the year ended March 2018. rep., pp. 69–94.

^[10]Assessments relating to agricultural income. Available at: http://www.indiaenvironmentportal.org.in/files/file/assessments relating to agricultural income.pdf (Accessed: 04 March 2024).

[11] “Kumar, S. (2020). Agrarian Crisis and Framers Issues in India. From Indebtedness to Suicide. Agrarian Crisis and Farmers Suicide in India. The Voice Unheard; Best Publishing House: New Delhi, India, 125-154.

[12] Trumboo, N. (2022). Agricultural Income Tax in India: Introducing Threshold-Based Tax Exemption. Indian Journal of Public Administration, 68(1), 21-33.”