The issue of taxing farm income seems to arise regularly, particularly before the annual budget is presented, due to concerns that wealthy individuals and corporates evade tax by reporting their income as tax-exempt agricultural income. There have been many cases of nurseries, seed companies, and contract farming companies claiming an exemption on income from such activities. In some of these cases, the courts did not consider their actions as agricultural activities.
The rationale for taxing agricultural income is similar to that for taxing the wealthy, as such tax is progressive and can help reduce rural wealth inequality. For instance, 45 percent of the land is still in the hands of non-small farmers who constitute only 15 percent of the total farming households. In Punjab, small and marginal farmers, who constitute a little under one-third of the total farm households operate less than 10 percent of the total agricultural land due to reverse tenancy. Such a tax can promote horizontal and vertical equity, meaning that equals are taxed equally, and unequal are treated unequally. Therefore, this is not just about inter-sectoral equity but also intra-sectoral equity.
Landholding As A Criteria
Often, it is argued that most farmers are small and marginal, and since incomes up to Rs 2.5 lakh are currently exempt from income tax, not many farmers would fall under the tax net. It is a different matter that basing income tax on land holdings is not desirable, as the size of land does not necessarily correspond with farm income; there are different contexts of agricultural activities, such as irrigated and dryland, and different limits to owned land holdings across states under the Land Ceiling Acts.