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.
(Representative image)
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.
Furthermore, it is also pointed out that when average farm income across India is very low, many farmers are indebted and have resorted to suicide in some regions, and when the central and state governments are providing Direct Benefit Transfers (DBTs) to landholders, it is illogical to think of taxing farm income. However, it is important to point out that a policy measure like PM Kisan, which is blind to equity considerations, does not make a logical case on this issue.
Simply put, if most agricultural producers are marginal or small farmers, then logically, they will be automatically exempt from income tax if they do not earn enough. However, that clearly does not seem to be the case. It appears that the political economy of the agricultural sector has prevented the introduction of income tax across states, as lobbies of powerful large and medium farmers who will be the first ones to be impacted by such a measure influence political opinion on this policy. It is also tragic to see that these farmers who do not pay any income tax though they have large farms and huge volumes of marketable produce also benefit unduly from various farm input subsidies and public procurement of their produce at Minimum Support Price (MSP).
Another argument against income tax on agricultural income is that despite the reduction in the agricultural sector's share of Gross Domestic Product (GDP) to less than 15 percent, it continues to support over 40 percent of the workforce. As a consequence, income levels are low in general compared to other sectors of the economy. It is further argued that the sector's performance in terms of GDP growth rate has not been very encouraging for the past few decades and terms of trade have been unfavourable.
Apart from that, farmers suffer income uncertainty due to production and market risks, and effective mechanisms against these risks like crop insurance or market interventions by the state are either absent or too limited. Also, the privatisation of education and health had increased the living costs for rural and agricultural households. In such a situation, many argue that any proposal to tax farm income would be a disservice to the sector. But the sectoral-level estimates of the tax burden or potential conceal more than they reveal and can be misleading about the tax situation of individuals in the agricultural sector. One cannot argue against taxing the income of some earners because a sector is not doing well.
The rationale for introducing agricultural income tax also stems from the changes in the structure and organisation of Indian agriculture, as well as the composition of agricultural output – which have shifted from food grains to non-food grains and high-value crops, such as horticulture, and livestock. Moreover, a new set of agricultural entrepreneurs with relevant knowledge, skills, and resources, who undertake farming as a profitable activity and earn lucrative profits from it have also emerged.
Through The Taxman’s Lens
The income tax data, however, tells a different story. The Comptroller and Auditor General (CAG) in a review in 2019 found that a set of assessees had claimed as much as Rs 50 lakh each as agricultural income. The CAG had reviewed 6,778 cases out of 22,195 scrutiny assessments between 2015 and 2017 comprising those who had claimed more than Rs 5 lakh in agricultural income each and found that a total of Rs 3,656 crore was claimed as agricultural income. Significantly, corporate entities accounted for 57 percent of the total claims. This begs the question: how can corporate entities like seed companies, which have no farmlands of their own due to the Land Ceiling Acts at the state level, claim agricultural income and subsequently, also its exemption from income tax?
It is important to note that farmers in many states pay some income tax. States such as Assam, Tamil Nadu, Kerala, Maharashtra, Odisha, Uttar Pradesh, and West Bengal have an agricultural income tax, although it is payable only for certain crops and activities. There are no restrictions on any state government introducing such a tax, though it can lead to uneven application of the measure across the country.
In principle, any income, including agricultural income, should be subject to tax. Even if most farmers remain outside the scope of income tax, announcing it in the budget will have a salutary effect on non-farming entities reporting their income under the agricultural category and going tax-free. It can also reduce wealth inequality, left largely unattended due to poorly implemented land reforms. One of the ways to overcome the difficulty of introducing agricultural income tax is to amend the definition of 'income' in the Income Tax (IT) Act itself and introduce an appropriate threshold so that all agricultural incomes are not exempt from tax. Additionally, professionals or public servants disclosing agricultural income should be taxed at regular income tax rates like any other citizen.
There can be exemptions for some categories of farming households, such as marginal and/or small farmers or such farmers only in dryland regions. As an introductory measure, a flat lumpsum tax based on landholding and/or crops grown can be implemented. In many countries, a presumptive technique is used to assess income based on various indicators of gross income per unit area including the value of marketable surplus, and to tax it. If a farmer is not satisfied with the computation of her/his agricultural income, the onus of furnishing proper accounts of actual income lies with the farmer. At a minimum, farmers above a certain threshold income level should be required to file returns, so that they become part of the formal tax regime. Their income could be averaged over three years instead of annually, to account for variations, which are not uncommon in the farm sector.
Sukhpal Singh is Professor at IIM, Ahmedabad. Views are personal and do not represent the stand of this publication.
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