Not worth the tax

Forget agriculture, it is more prudent to collect taxes from the service sector where the bulk of black income is generated.

Written by Arun Kumar | Published:June 14, 2017 12:00 am
service sector, service sector tax, agriculture tax, farmers agitations, GDP, economic growth, service sector growth, demonetisation, Income Tax Return, indian express news, opinion If such data was available, demonetisation to unearth black incomes was not required. Investigation of these eight lakh plus entities would have been enough. C R Sasikumar

The Niti Aayog press conference a month ago, in which the taxation of agricultural incomes was suggested, embarrassed the NDA government. When there are farmers’ agitations in many parts of the country, and talk of farm loan waivers, does this make sense? The politics of such a move is clear, its economic aspects were spelt out in an article by Bibek Debroy in this paper (12 reasons why, IE, May 3).

The article made 12 points, but it missed the 13th, which follows from the 12th point. This missed point makes the other points redundant. The 12th point stated that the answer to an RTI application revealed that “In 2012, 8,12,426 individual tax payers disclosed agricultural income. The average income per individual assessee was Rs 83 crore.” So, the incomes of these individuals turn out to be an astounding Rs 674 lakh crore. The GDP in 2012-13 was a little less than Rs 100 lakh crore.

If correct, these individuals declared incomes that were 6.7 times the GDP: Thus, the black economy that year was far more than Rs 574 lakh crore or 574 per cent of the GDP. Coming from a high government official, all this cannot be doubted.

If such data was available, demonetisation to unearth black incomes was not required. Investigation of these eight lakh plus entities would have been enough. Why did a billion people stand in endless queues for two months? Many people lost their jobs, went hungry, even died in queues and so on when officials knew what to do.

According to data in the Income Tax Return Statistics AY 2012-13, in 2012-13, the “Number of Effective Assessees” was 4,72,67,582. That number rose in 2014-15 to more than 5.167 crore. The categories included here were Company, Firm, HUF, Individual, Trust and so on. However, no category called agriculture is mentioned. This is understandable since there is no tax on such incomes. Then, how is data on agricultural income being generated by tax authorities?

If one has income from both agriculture and non-agriculture, then one declares the agricultural income as well, even though one does not have to pay a tax on that. It is just like dividend income, which, in the hands of an individual, is free but is declared in the return. The income data from the tax department for Assessment Year 2012-13 reveals that only 73,000 entities filed a return of above Rs one crore and, of them, 1,600 entities filed a return of above Rs 50 crore. Only 2,600 entities paid a tax of above Rs 10 crore. So, very few from the non-agriculture sector declared any income close to what the RTI data reveals.

It is conceivable that people declaring a small non-agricultural income may declare large agricultural incomes. But then, they should be suspect and investigated by government agencies. Since there were about eight lakh such entities, scrutinising their accounts should not be that difficult. If these black incomes were caught, then 200 per cent of the GDP would have accrued as tax collection whereas today, only 5.5 per cent of the GDP is collected as direct tax. Is this data believable? That brings one to the fourteenth and subsequent points.

If the GDP figures rather than the RTI ones are taken as more credible, how much income tax can be collected from agriculture, assuming that the income distribution in agriculture and non-agriculture are similar? There are 138.35 million operational holdings, but how many would have taxable incomes if agriculture were to be taxed?

The share of agriculture and allied activities in the GDP is around 14 per cent. That would mean a GDP contribution of about Rs 21 lakh crore out of Rs 150 lakh crore. The net income that would be taxable would be much less.

Roughly 50 per cent of the work force is in agriculture, and a similar per cent in non-agriculture. But the former earn only 14 per cent of the GDP while the latter make up 86 per cent. Since India’s per capita income now is around Rs one lakh, the average income in agriculture would be only around Rs 27,000.

From the 86 per cent of GDP contributed by non-agriculture, 5.5 per cent is collected as direct taxes. Assuming that the distribution of income in agriculture is similar, from the 14 per cent of GDP that this sector contributes, one can only collect less than one per cent of GDP. But the average agricultural income is one fourth of that of non-agriculture, so one would expect to collect only 0.27 per cent of GDP.

Adjusting for deductions, etc., the collection may be no more than 0.1 per cent of the GDP. Collecting this tiny bit of tax would be horrendously difficult for a variety of reasons, including definitional and administrative ones, so that cost may not justify the likely tax collections.

How much would the tax collection from agriculture rise over time (called “buoyancy”)? Not much, given that the share of agriculture in the GDP has been falling. So, it can only contribute a declining share of taxes. The alternative would be to collect more from the services where the bulk of black incomes are generated.

In conclusion, while for the sake of equity, all incomes should be treated alike, agriculture is a special case. It is not that if agricultural incomes are not taxed, there is no tax on such incomes. Keeping agricultural prices low is also a tax. Finally, if the 12th point is believable, eight lakh entities are generating large black incomes; if they are tackled, neither demonetisation, nor a tax on agriculture is needed.

Kumar is a retired professor of economics, Jawaharlal Nehru University and author of ‘Indian Economy since Independence: Persisting Colonial Disruption’

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  1. R
    Ramesh Chhabra
    Jun 14, 2017 at 8:52 pm
    Question arises "Why did a billion people stand in endless queues for two months? Many people lost their jobs, went hungry, even died in queues and so on when officials knew what to do" is valid question. Last year railways had hiked fares of AC-2 3 class. First AC was not hiked stating it is already more. What a surprise was? In brief, ministry do not want annoying Rich. It seems it is policy of Government not to levy more fares or taxes from riches (levying more fares taxes from middle or lower) . GST may levy less on cars.
    Reply
    1. S
      Seshubabu Kilambi
      Jun 14, 2017 at 7:58 pm
      Taxes are levied on poor and downtrodden while big fish are left off the hook ... The big corporates fund poitical parties
      Reply
      1. B
        Bharat
        Jun 14, 2017 at 6:43 pm
        Every year one lakh crores are writen off for farmers debts. This is our money on which a failed agricultural experimentation is going on. GM seeds and Monstana are eating into our agro universities and into our govt ministries. Our food bowl looks eroded and denuded like the entrails of a dead farmer toiling in his barren fields with vultures flying high.... Loan sharks fleece and the Mandi markets short change the farmer to a penniless state. All farmers are not to be taxed but the dalas and supermarkets and the mandis to be taxed on the profits compulsorily. Farmers are commiting suicide while Agro don Sharad Pawar is flying high. Tax the rich and protect the poor. Sa uard the Land, Cattle, Water Canals from soil erisuon and starvation and you can save the food bowl. NABARD should be analysed as to where their max funds are given for boosting agricultural or for beef trade ....
        Reply
        1. C
          Contrarian
          Jun 14, 2017 at 4:52 pm
          Agricultural Income Tax can be levied by the state to be spent entirely on the village that accounts for it. If money is spent on their own village, perhaps more people would be happy to pay tax.
          Reply
          1. E
            Employ Ment
            Jun 14, 2017 at 4:31 pm
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            Reply
            1. A
              Ajit
              Jun 14, 2017 at 3:31 pm
              I think it is question of tax discipline and contribution to Nation. Even if Rs 1 tax is collected then it should be done. People who pay taxes demand governance so it is imperative for government to have taxation policy that covers most and not 2 or 3 of population. This also shows we have not used tax policy innovatively but copied western model. If Panchayats were to impose even 3 to 5 tax the rural landscape would have changed. There would have been no need for loan waivers and amenities in village would have been better for low income families.
              Reply
              1. A
                Apte
                Jun 14, 2017 at 10:43 am
                1. Author’s view that (part time) agriculturists are in a position to evade tax by showing large agricultural income is true. In cash-dominated rural economy, it is easy to show higher farm income. Politicians and businessmen are the biggest beneficiary of tax-free agricultural income. 2. I believe that instead of considering taxation of agricultural income, it would be more logical to allow freedom to sell and buy agricultural land. of farm land to a non-farmer can attract more stamp duty than say to a farmer. As it is many politicians, who claim to be representatives of farmers, often argue that farming is no longer profitable. Then why not allow farmers to sell land freely to anyone who is ready to buy it? There can be strict conditions attached to such which would prevent the buyers from using the purchased land for purposes other than farming. Measures have to be taken to revamp agricultural produce marketing system and to protect interests of farmers and consumers
                Reply
                1. A
                  Ajay G
                  Jun 14, 2017 at 10:11 am
                  Not many MPs and politicians plus Industrialists (I guess even bureaucrats) will be left out when these 8 Lakh accounts will be investigated. Who will bell the cat !!!
                  Reply
                  1. V
                    Virender
                    Jun 14, 2017 at 12:01 pm
                    Add to this Judiciary and Media Barons. Drama is complete....
                    Reply
                    1. C
                      Chawla G
                      Jun 14, 2017 at 12:27 pm
                      All are scoundrels.
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