Though Finance Minister Arun Jaitley has said the government will not tax agricultural income, NITI Aayog member Bibek Debroy has defended his proposal made in April while releasing the commission’s three-year action plan to chief ministers.
Writing in the Indian Express, Debroy says the Income Tax Act of 1860, which is a precursor of the present law on the subject, had introduced it and agricultural income was taxed until 1886, when it was withdrawn to defuse the resentment against colonial rule.
Many states had agricultural income tax acts, he says: Bihar (1938), Assam (1939), Bengal (1944), Orissa and Uttar Pradesh (1948), Hyderabad (1950), Travancore and Cochin (1951) and Madras and Old Mysore State (1955). In 2016, Karnataka repealed its 1957 agricultural income tax Act. Debroy is pretty sure that Assam, Kerala (1991), Tamil Nadu, Orissa, Maharashtra (1962) and West Bengal retain their agricultural income tax acts.
Land revenue tax hasn’t quite worked and must be replaced, says Debroy. There must be an unified system of taxation across states. Agricultural income taxation must be integrated with non-agricultural income taxation. Debroy cites the 2002 report of the Vijay Kelkar task force on direct taxes, which said not taxing agricultural income violated horizontal and vertical equity and “encourages laundering of non-agricultural income as agricultural income, that is, it has become a conduit for tax evasion. Both the arguments are empirically verifiable.”
He adds that the Vijay Kelkar report further said: “A rental arrangement should be designed whereby states should pass a resolution under Article 252 of the Constitution authorizing the Central government to impose income tax on agricultural income. The tax collected by the Centre would however be assigned to the states. Most agricultural farmers would continue to remain out of the tax net.” Debroy, says it was estimated that in 2002, about 95 percent of farmers would be out of the tax net.
It is a point which the Business Standard uses in an editorial to argue against taxing agricultural income. While it agrees with Debroy that taxing agricultural income would widen the tax payer base, it says the fiscal benefit would be low as it would require a holding of at least 10 hectares for individuals to earn Rs 2.35 lakh a year (based on the latest round of the National Sample Survey). Income tax is charged only on incomes above Rs 2.5 lakh a year. More than 86 percent of farmers have holdings which are of less than two hectares. The newspaper argues that it would be better to reduce farm subsidies and replace them with direct income support. “Perhaps those transfers could segue in time into an earned income tax credit system. This might induce voluntary movement into the tax system.”
But there is little double that the exemption for agricultural income from taxation is being misused. Based on RTI replies, Debroy says in 2012, 8,12,426 individual tax payers disclosed agricultural income averaging Rs 83 cr. In 2015-16, 16,307 individuals reported agricultural income of more than Rs 1 cr a year. In 2014-15, a company made a profit of Rs 215 cr but paid no income tax claiming it was agricultural income.
The definition of agricultural income is not without dispute. Section 2 (1A) of the Income Tax Act defines agricultural income as rent/revenue from land, income derived from this land through agriculture and income derived from buildings on that land. Section 10 (1) of the Income Tax Act excludes agricultural income from the computation of total income. Debroy says bringing agricultural income under taxation is not the same as taxing all farmers. There will be thresholds, he says, below which farmers will be exempt.
(For these farmers in Bihar’s Vaishali district, income tax is a joke. Photo by Vivian Fernandes).