Twelve reasons why

The current outrage over the proposal to tax agricultural income misses the point — often deliberately

Written by Bibek Debroy | Updated: May 3, 2017 12:39 am
C R Sasikumar

Amnesia and ignorance don’t facilitate discourse, especially when indulged in by people who catapult themselves into it, without being aware of the present policy or its past evolution. This piece is not meant to stir the pot on agricultural income taxation further, but it will state some facts. First, Section 2 (1A) of the Income Tax Act defines agricultural income as rent/revenue from land, income derived from this land through agriculture and income derived from buildings on that land. Second, Section 10 (1) of the Income Tax Act excludes agricultural income from a computation of total income. Neither of these sections is dispute-free and chartered accountants and lawyers have been enriched via these. But broadly, these propositions are true.

Third, conditions on the sale of agricultural land vary from state to state. In some states, there is a requirement that land can only be sold to “farmers”. But not every state requires this. When there is a stipulation, there are no credible checks on “farmer’s certificates”, in addition to circumvention through the leasing route. Fourth, in the Seventh Schedule, Entry 82 in the Union List mentions taxes other than agricultural income, while Entry 46 in the State List mentions taxes on agricultural income. Therefore, arguing that this is in the State List is valid. But, if I have apoplexy at the mention of an agricultural income tax, there can be only two conclusions: I don’t know that some states tax agricultural income, or I am denying state legislatures their right to tax agricultural income.

Fifth, long before the Income Tax Act of 1961, there was the Income Tax Act of 1860, now forgotten. This was the introduction of income tax in India (in a modern sense) and it was meant to be temporary. Wonder of wonders, it taxed agricultural income till 1886. What changed in 1886, or between 1860 and 1886? The answer had more to do with general resentment against colonial rule, and less to do with agricultural income taxation directly. Sixth, in 1932, there was the Federal Finance Committee of the Round Table Conference and its report. If we have the present constitutional structure, that’s because of this report and the Government of India Act (1935).

Seventh, we have had Agricultural Income Tax Acts in Bihar (1938), Assam (1939), Bengal (1944), Orissa (1948), Uttar Pradesh (1948), Hyderabad (1950), Travancore and Cochin (1951) and Madras and Old Mysore State (1955). Eighth, this isn’t entirely history — we still have the Assam Agricultural Income Tax Act (1939), the Bihar Agricultural Income Tax (1939), the Kerala Agricultural Income Tax Act (1991), the Tamil Nadu Agricultural Income Tax Act (1955), the Orissa Agricultural Income Tax Act (1947), the Maharashtra Agricultural Income Tax (1962) and the Bengal Agricultural Income Tax Act (1944), or so I think.

Unlike the Karnataka Agricultural Income Tax Act (1957), repealed in 2016, I am not aware of these statutes having been repealed. Therefore, it isn’t true that states don’t tax agricultural income, though it’s true that they tax some kinds of agricultural income, such as plantations. Ninth, it isn’t as if this issue was discovered yesterday. The issue of taxing agricultural income (and wealth) goes back to the 1960s. There must be a unified system of taxation across states. Agricultural income taxation must be integrated with non-agricultural income taxation. Land revenue tax hasn’t quite worked and must be replaced.

There is a considerable amount of literature from the 1960s and 1970s, based on such principles. To those who wonder about how an agricultural income tax will be implemented, may I suggest reading the 1972 Raj Committee Report on Taxation of Agricultural Wealth and Income. You don’t have to agree with the committee’s agricultural holding tax idea, but it isn’t as if no one has thought about implementation. May I also suggest the Fourth Five Year Plan (1969-74) document and the report of the Fifth Finance Commission (1969) as well? Indeed, if one looks for strong arguments in favour of agricultural income taxation, one will find them in the report of the Taxation Enquiry Commission (1953-54).

Tenth, there can be problems with generalisations. I guess, in logic, this would be called a fallacy of composition: Epimenides is poor; Epimenides is Cretan. Therefore, all Cretans are poor. Now, read “farmer” instead of Epimenides. Not realising there are thresholds, irrespective of whether in agriculture or non-agriculture, is a deliberate attempt at obfuscation. Eleventh, in 2002, there was the report of the Vijay Kelkar Task Force on direct taxes. This made the point that not taxing agricultural income violates horizontal and vertical equity and it “encourages laundering of non-agricultural income as agricultural income, that is, it has become a conduit for tax evasion. Both the arguments are empirically verifiable.”

This empirical validation was done on the basis of tax returns in Mumbai. This report proposed, “A tax rental arrangement should be designed whereby states should pass a resolution under Article 252 of the Constitution authorising the Central government to impose income tax on agricultural income. The taxes collected by the Centre would however be assigned to the states. Most agricultural farmers would continue to remain out of the tax net.” At that time, estimates were that 95 per cent of farmers would be below the threshold.

And twelfth: Consider some figures from an RTI application filed by Vijay Sharma last year. In 2012, 8,12,426 individual tax payers disclosed agricultural income. The average income per individual assessee was Rs 83 crore. Do the multiplication and the mind boggles. In assessment year 2015-16, 307 individuals reported an agricultural income of more than one crore rupees a year. In 2014-15, a company made profits of Rs 215 crores, but claiming the agricultural income exemption, it paid no tax.

The writer is member, Niti Aayog. Views are personal

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  1. M
    Manjit Nath
    May 3, 2017 at 9:05 pm
    This is perfect reply and clear cut case of evidence based policymaking
    Reply
    1. R
      Ramesh Chhabra
      May 3, 2017 at 9:00 pm
      What is thickness of Income tax act Book IT excluding Agriculture, computing IT ? And why so thickness? First IT act may simplify.
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      1. A
        Avinash
        May 3, 2017 at 7:06 pm
        Land holding of majority of Indian farmers falls under the category of marginal farmers. whose income will rarely cross the income tax threshold, hence govt. should impose income tax on agriculture income at the same time govt should lift all the ban on export of agriculture commodity. Whenever their is rise in the domestic prices, govt immediately ban the export of that agriculture commodity and farmers are deprived of the lucrative prices. Every time govt shield with essential commodity act. India is liberal economy but not for agriculture. That's the reason our farmers will be always poor. Very hard working Indian farmers are capable of competing with global farmers. This has been proved in case of fruits. thank god govt. doesn't classify fruits under essential commodity.
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        1. V
          Venkat
          May 3, 2017 at 4:53 pm
          Prof. Deb Roy appears to be on solid grounds and policy makers need to heed his opinion before dismissing it. The Aayog should not have dissociated itself in this matter.
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          1. A
            Anurag Banerjee
            May 3, 2017 at 4:20 pm
            Amazing the kinara shops have to pay tax, or the carpenter has to pay tax in income, the daily wage labour have to pay tax (if income crosses threshold) but not the farmer! What's so special ? Agri business is just a business
            Reply
            1. S
              Sudarshan Nityananda
              May 3, 2017 at 4:07 pm
              Mr Debroy seems to have quoted some exaggerated figures in the last para. If 8 lakh people had an average income declared of Rs 83 cr each, that amount to Rs 664 lakh crore. Even our total national income is just Rs 125-150 lakh crore. How can Mr Debroy's figure be correct. And does this not weaken the case for tax on agricultural income ?
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              1. D
                D K
                May 3, 2017 at 3:47 pm
                Exempting agricultural income from tax is not a favour to the actual farmers but it is a favour to the persons who have tax evaded income which they disclose as their agricultural income.So taxing agriculture income cannot be said to be a anti farmers step.
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                1. S
                  SP
                  May 3, 2017 at 1:14 pm
                  Those who are defending waiver for income tax on agriculture either have vested interest to protect criminals or worried about political messaging. Let us make a beginning with taxing those who have more than 10 Lac income at 10 . If all other income is taxed by center, why agriculture should not be taxed by cente when it spends so much on subsidies. It is high time our Governments did ethical thing
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                  1. R
                    rkannan
                    May 3, 2017 at 12:04 pm
                    The entire controversy is meaningless. Agricultural income is like any other income and should be taxed.
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                    1. J
                      Joe
                      May 3, 2017 at 2:06 pm
                      Agricultural income is not like any other income, agriculture is a very uncertain venture, but is vital for our nation and the government regulates it (including providing tax exemptions) to reduce stress on farmers while controlling food prices and ensuring basic food security in the nation. People misusing this exemption can be pursued but to claim an agriculturist should be treated like any entrepreneur or worker is not right.
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                      1. A
                        Anurag Banerjee
                        May 3, 2017 at 4:22 pm
                        So is any business! Show me a business which is risk free. Check how many carpenters gets income daily
                    2. S
                      stranger
                      May 3, 2017 at 10:41 am
                      totally agreed. the corruption lobby is the main supporter of tax free agr. the same people who tried to subvert the demonit as much as possible and with good success. agr. income being tax free and also difficult to trail serves as vehicle for converting and holding black money with minimum risk cost and effort.
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                      1. S
                        Sajad Padder
                        May 3, 2017 at 10:09 am
                        This analysis makes a case for revision of the policy on agricultural taxation. There are of course patchy areas where non-agricultural income is camouflaged as an agricultural one for tax evasion. Ashok Gulati has also pointed this fact earlier in his columns. The nexus between big landlords/farmers and politicians is a common problem both in India and stan.
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                        1. T
                          The Observer
                          May 3, 2017 at 10:05 am
                          Bibek is a lone voice. For politicians vote bank and clinging to power is more important.. soon he might expect a marching order.. he should know what is good for economy is not always good for politics and vote bank and the later always wins hands down.
                          Reply
                          1. D
                            Deepak Gupte
                            May 3, 2017 at 10:04 am
                            It is irresponsible to quote such a high level of agriculture income by giving an obscure reference to Vijay Sharma and RTI. NITI AAYOG member alleging negligence on the part of Income Tax department is unpalatable.
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                            1. N
                              NPY Raman
                              May 3, 2017 at 6:42 am
                              The sudden reaction to this not-so-new issue of taxing of farm income is uncharacteristic of a FM but characteristic of the politician in him. How can he foreclose the w issue when he is never tired of harping on the country's low tax base?
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                              1. T
                                The Observer
                                May 3, 2017 at 10:11 am
                                Finance is alien to Arun Jaitly .. he neither under stands tax nor fiancé and accounts. Very weak in numbers. If one has listened to the budget speech it is very obvious. Expecting him understand the concept is too much. In fact because of him and his ministry they royally ed up the the bold decision of demonitisation with poor handling of cash withdrawal post deposit of old notes. His ministry is still sending courier notices to fake address / duplicate PAN Card holders and dummy companies.
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