The gross fiscal deficit for the average state government is slated to rise to 3 percent of the State Domestic Product. The political economy is working to raise, rather than compress the deficit, parties competing to provide ever larger and ever more handouts to the public. Subsidy expenditure in state budgets is rising at more than 25 percent. It is time, therefore, for them to tap an unused source of revenue: agriculture.
Taxing agriculture is the prerogative of states
Item 46 on List II, or the State List of the Constitution’s Seventh Schedule, lists tax on agricultural income as a state subject. It is up to states to institute and levy a tax on agricultural income. The states do levy such an income in a modest way. They tax the income of plantations, but that is about it. The states should go beyond plantations to extend their income tax to farm incomes outside plantations.
Does this amount to blasphemy of sorts? Farmers are our annadata, providers of food, the salt of the earth, tireless toilers who brave the sun and the rain, wintry cold and blazing summer heat to produce food for the nation. How can anyone suggest that they should pay tax?
Consider another set of people who brave the heat and the cold, do their work regardless of rain or shine, and put their lives on the line, besides: our soldiers and policemen. They pay tax on their incomes, just like all others, except for farmers.
A sliver will fall into the tax net
According to NSS Report No. 587: Situation Assessment of Agricultural Households and Land and Livestock Holdings of Households in Rural India, 2019, 70.4 percent of rural households owned land less than 1 hectare (ha) in area.
Average gross cropped area per agricultural household is 0.889 ha. The average value of crop production per rural household is in the region of Rs 48,000. These small producers would obviously be outside any kind of income taxation.
Only 0.4 percent of agricultural households own land in excess of 10 ha. These households would, in all probability, be subject to taxation. Agriculture contributes only 14-17 percent of the gross value added, depending on the bounty of the harvest and the pace of economic growth overall. Considering that only a small fraction of those generating this income are liable to pay tax, should governments devote their scarce administrative resources to chase after agricultural income tax?
Harness data to close loopholes
The third Tax Administration Reform Commission Report (2014) noted that agricultural income of non-agriculturists is being increasingly used as a conduit to avoid tax and for laundering funds, resulting in leakage. The whole point of states initiating a serious effort to tax agricultural income is not so much that it would directly lead to a big, immediate jump in their revenues as that it would help close a big hole in the Centre’s income tax net. And a share of the additional income tax the Centre collects belongs to the states.
It is far more efficient and equitable for some taxes to be collected by the Centre and shared with the states, rather than for these to be collected by the states, and appropriated by the states that collect the taxes. This is why income tax and customs duties are assigned to the Centre, but with the provision that the proceeds would be shared with the states. In what proportion these are to be shared between the Centre and the states, and how the share going to the states is to be apportioned among the states are to be determined by a finance commission, appointed every five years.
To bring farm incomes into the tax net is easier said than done. Computing income calls for deduction of input costs from farm sales. Estimating the individual components of costs and revenue would be difficult. But the ability to garner data and to analyse data is increasing every day, with satellite/drone imagery of cropped area, market intelligence, weather information, insurance premia for crops, and claims, and social media posts of rich farmers serving as useful inputs.
A beginning has to be made, for assessment to improve. Closing the loop through which people pass off a portion of their income as agricultural income to claim exemption from income tax is only the first step. As India continues to prosper, farming would also consolidate, to secure scale economies, get organized and be easier to tax. Farm incomes could yield additional significant tax revenue for the states, even as agriculture grows progressively smaller as a share of GDP.
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