Taxing the Rich Farmers – Current status of Farm Taxes, pros and cons

Recently, economist Bibek Debroy, a member of the NITI Aayog, recommended that the agricultural income above a certain threshold should be taxed. This brought back the question of the status of taxation on agriculture. Almost 20% of GDP of the country comes from the agricultural sector but still its share in the revenue generated in terms of tax is less significant.

Status of agricultural tax India

By default, agricultural income is exempted from taxation and not included under total income. The Central Government can’t impose or levy tax on agricultural income. The exemption clause is mentioned under Section 10 (1) of the Income Tax Act, 1961.

However, state governments can charge agricultural tax. As of the latest amendment, income from agriculture, if within INR 50000 in a financial year, will not be accounted for tax purposes. Anything above that will be taxable as per the applicable rates. As per the finance act, the total tax liability for a person would include the agriculture income added to the non-agricultural portion. Though being exempted from tax through Section 10 (1), tax on agricultural income still persists in the state level if the mentioned income exceeds INR 5000 per year and if the total income excluding agricultural income is more than the basic exemption limit. For firms, non-individuals and companies it is easier to pay the associated tax as the tax is charged at a flat rate on the chargeable income. For salaried individuals, it might increase the tax they need to pay because of the aggregation of income. Agricultural income is taxed in several states, including Assam, Tamil Nadu, Kerala, Maharashtra, Orissa, Uttar Pradesh and West Bengal. In many of these cases, the tax is only on a certain kind of agricultural income, but it is taxed.

Agricultural income mentioned above includes:

• Any rent received from land which is used for agricultural purpose.
• Any income derived from such land by agricultural operations including processing of agricultural produce, raised or received as rent in kind so as to render it fit for the market, or sale of such produce.
• Income attributable to a farm house subject to the condition that building is situated on or in the immediate vicinity of the land and is used as a dwelling house, store house etc.

Imposing tax on agriculture: Pros

The biggest claimants for the exemption from paying tax are generally big agro companies; for example, seed giant Kaveri Seeds which claimed to get exemption of Rs 186.63 crores and made a profit of Rs 215.36 crore before tax and multinational Monsanto India, which claimed Rs 94.40 crore as exemption from agricultural income and earned Rs 138.74 crore profit before tax. Agro-companies growing crops are allowed the same tax relief as individuals in states levying no agricultural income tax, although some states do indeed tax some kinds of farming. Hence, there are certain advantages of taxing the agricultural in the country:

• The first and the foremost is that it will prevent the investment of black money used in tax evasion.
• Also, taxing the farming sector will lead to account keeping which would further help in improvement of this core sector.
• The loans would also be facilitated easily as the borrowers can be identified easily on the basis of Income tax returns.
• Due to taxation, it will be easy for the banks to identify probable creditworthy borrowers and to also ensure that credit does not get sidetracked for other usage.
• Taxing agricultural income in India would to add some additional revenue which would further reduce the fiscal deficit, India is facing.
• Also, the benefits of the exemption are also available for the rich class of farmers or big agro companies; therefore, they deserve to be taxed to generate more revenue.
• Due to exemption of tax, there is prevalence of moneylenders who exploit the poor farmers, which would be reduced if the agricultural income is taxed.
• Also, if the tax is imposed on agricultural income above a certain threshold, then it would be easier to tax rich farmers and subsidise the poor.

Taxing agricultural income: Cons

The disadvantages of imposing tax on agricultural income are less than its advantages but still are pivotal to shape the policy regarding the same, if kept in mind. Some of the disadvantages are:

• If agricultural income were to be taxed, it would affect those farmers who will now need to pay a large part of their income as tax. As a resulting factor, they would obviously increase the prices.
• Moreover, most of the farmers in the country are illiterate and hence imposition of taxes would create a panic among them.
• Also, the tax revenue will be very low and it is not worth considering taxation of agriculture. It may be noted that farmers’ incomes, particularly small and marginal farmers, are very low.
• It is administratively difficult to implement. It is not likely to serve as an efficient instrument in view of the difficulty in obtaining adequate account on farm incomes and expenses and the real possibility of tax evasion by the more influential cultivators through overstatement of costs and understatement of output.
• There is also the possibility of harassment of the less influential and poor cultivators at the hands of petty officials.

Hence, these advantages and disadvantages should be kept in mind before forming any policy on taxation on agricultural income.