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.