July 25, 2024
📰 FEATURE STORY
Should agricultural income be taxed?
The 2024 Budget presented by Union Finance Minister Nirmala Sitharaman was hotly anticipated. It was the Modi 3.0 government’s first full budget. There was plenty of anticipation to see what was in store, especially for agriculture. The sector got ₹1.52 lakh crore and laid out 9 priorities for the year ahead. But interestingly, taxation on income earned through agriculture was absent.
For a long time, taxing agricultural income was something economists and others lobbied for. They said it was necessary given the reliance of the country’s economy on agriculture. While things have evolved over the years, some still see a case for it. However, there’s a lot of apprehension about whether taxing agricultural income will harm the sector.
Context
To better understand agriculture income and taxation, we need to go back to when the British ruled India and the Zamindari and the Raiyatwari systems. These were the two main systems of land taxation.
The Zamindari system was the so-called Permanent Settlement or the Cornwallis system. It was enforced in Bengal, Bihar, and Orissa. The government authorised a group of large revenue payers to collect the land tax from the occupiers or cultivators of land. The large revenue payers were called Zamindars in British documents.
Under the other system, the raiyats, or the occupiers, of land were asked to pay the land tax directly to the government. They weren’t necessarily the cultivators of the land, though. This tax varied from period to period – sometimes year to year. Over time, this was adopted to survey the tax-paying capacity of a particular region and the taxes were revised accordingly.
For the British, the Raiyatwari was more appealing since people were hesitant to hand over a substantial portion of the potential tax revenue to a group of landlords.
In 1925, the Indian Taxation Enquiry Committee stated that agricultural income should be taxed. They argued there was “no historical or theoretical justification for the continued exemption from the income tax of income derived from agriculture.” But no policy followed. A decade later, the power to tax agriculture went to the princely states and provinces. They, too, couldn’t decide on whether to tax agricultural income.
Post-independence, some states did try taxing agricultural income. Kerala, Assam, and Uttar Pradesh dabbled but backtracked since it didn’t work out. Economists made the case for taxation. For starters, agriculture was the primary source of income for a newly independent India. It also contributed 50% to the GDP. A tax would’ve generated a lot of income for the country.
But there was opposition. Most people believed that farmers would struggle with taxation and that collecting and monitoring activities would be expensive. India also had rules on how much land people could own, so the thought of a tax didn’t make sense.
Indian agriculture has come a long way through various ups and downs. More people have endorsed the idea of a tax on agricultural income. To some, it’s a necessity. For others, it’s a slippery slope.
VIEW: Its time has come
In 2017, NITI Aayog member Bibek Debroy called for a tax on agricultural income above a certain threshold. This was backed by the then-chief economic adviser, Arvind Subramanian. A Planning Commission sample study of cooperative farms showed that tax avoidance kicked in as mechanised farms with hired labour took advantage of the exemption given to cooperative farms. It got worse. For 2014-15, nine of the top ten exemption claimants were corporations.
Over the past few years, economists and panels have lobbied for agricultural income to be taxed. Most recently, in February, a Parliamentary panel urged the finance minister to explore the possibility of having different ‘codes’ for farmers who get their income from only agricultural activities and those from agricultural and non-agricultural sources. The panel pointed to something important – a tax won’t be uniformly applied to all farmers. That wouldn’t work. Instead, categorising agricultural income in slabs, like for individual income tax, would.
The government knows that not all farmers have large amounts of land and earn a lot. Since small and marginal farmers are taken care of through subsidies and money transfers, taxing rich farmers can balance the scales. Yes, earnings from tax are under the State List in the Constitution. But take GST as an example. While it has had its issues, it showed that the Centre and States can work together.
COUNTERVIEW: An uphill task
Taxing agricultural income, which is more often than not seasonal, is a tricky proposition. A tax would only add to the financial burden of most farmers. The reality is that farmers have more of a voice now than ever before. Politically and electorally speaking, they’re an essential bloc. Practically speaking, a government might not want to draw the ire of the community with a tax, even with those in a hypothetical smaller tax slab.
The seasonal nature of agricultural income means assessing the true income or income-earning potential will be difficult. A fair portion of farmers are illiterate or semi-literate and don’t have systematic books of accounts for production costs and income generated. If a tax is introduced, there’s the possibility that capital and credit will only flow to farmers with large land holdings since they’ll be able to generate more income.
If farmers are taxed, that could impact their investment plans. That means lesser amounts spent on modern technologies, for example. The snowballing effect here means less productivity. Also, any system where agricultural income is going to be taxed should be economical. There’s a chance that the revenue generated could be less than the costs associated with implementing and enforcing the tax system.
Reference Links:
- How Much do Agricultural Households Earn from Farming? – The India Forum
- Panel recommends separate codes for farm incomes – Financial Express
- Union Budget 2023: Is it time to tax India’s ‘richie rich’ farmers? – Moneycontrol
- Govt can look at taxing rich farmers, says MPC member Ashima Goyal – The Economic Times
- The necessity of taxing farmers’ income in India – New Indian Express
- Is taxation of farmer’s income feasible in a country like India? – Times of India
What is your opinion on this?
(Only subscribers can participate in polls)
a) Agricultural income should be taxed.
b) Agricultural income shouldn’t be taxed.
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