Should agricultural income be taxed? All you need to know

Taxing agricultural income has been a political taboo since Independence, but economist Bibek Debroy’s suggestion to the NITI Aayog is not without basis.

Published: 06th May 2017 12:06 PM  |   Last Updated: 06th May 2017 12:06 PM   |  A+A-

via Twitter @IncomeTaxIndia_

By Express News Service

NEW DELHI: Taxing agricultural income has been a political taboo since Independence, but economist Bibek Debroy’s suggestion to the NITI Aayog is not without basis.

Contrary to popular perception agricultural income is already being 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.

In fact, several other states like UP and Rajasthan tried to implement a tax on agriculture but found that it did not result in any great increase in revenue, and so discontinued it.

An agricultural income tax was an issue even in British India, and a committee was set up in 1925 to study whether it was feasible. In Independent India, the issue has been debated off and on since 1953-54. The K.N. Raj Committee report of 1972-73, called Taxation of Agricultural Wealth and Income, dealt with implementation issues.

Agricultural income is exempt from tax only by default. It is not included under total income for tax purposes. The central government cannot impose a tax on agricultural income under an exemption clause mentioned under Section 10 (1) of the Income Tax Act of India.

"My critics don't know that as recently as in 2002 there was a Kelkar Task Force report which estimated that if you use the existing threshold, 95 per cent of farmers would be below the tax threshold," Debroy said.

Undeterred by the row stoked by his comments, Debroy is sticking to his guns that agricultural income should be taxed and says that the onus for this must be on the state governments.

"I said that agricultural income should be taxed above a threshold. I also said it's a state subject and it's up to the states to do it. That was my position then and that is my position now," Debroy said.

The economist’s remarks on April 25 raised the hackles of political parties including MPs of the ruling BJP who said such economists were not in touch with reality and did not know the problems of farmers.

The very next day, finance minister Arun Jaitley stepped in to douse the fires by clarifying that the central government had no plans to impose any tax on agricultural income as it did not have the constitutional authority to do so.

"The Finance Minister also said it is a state subject and the centre has no plans to tax agricultural income. How is it a contradiction to what I have said," Debroy wondered.

He added that even Chief Economic Adviser (CEA) Arvind Subramanian's remarks were in line with his statement.

Subramanian restoked the debate when he said that nothing prevented state governments from taxing agriculture income as the constitutional restriction was only on the central government.

A week after Debroy first made the remarks, NITI Aayog said in a statement that his suggestion to tax agricultural income was neither the view of the Aayog, nor it was part of the Draft Action Agenda document conceived by the planning body.

A route to tax evasion

While agricultural income is not taxable by the Income-Tax Department, it still has to be declared. IT returns show that 307 individuals declared an agricultural income of more than Rs 1 crore during fiscal 2014-15. 

Debroy said one company which earned a profit of Rs 215 crore and yet claimed exemption worth hundreds of crores as its income was from agricultural sources.

"Now how is it reasonable to say that they should not pay taxes," he asks.

Several irregularities have been declared in the use of the exemption clause in the Income Tax Act. In the assessment year 2014-15, the top 10 claimants for tax exemption of agricultural income included nine corporate companies. The other was a state government department.

In 2014 Tax Administration Reform Commission report said, “Agricultural income of non-agriculturists is being increasingly used as a conduit to avoid tax and for laundering funds, resulting in leakage to the tune of crores in revenue annually.” 


When was income tax introduced?

Income tax was first introduced in1886 under colonial rule. At that time agriculture was excluded from the tax computation because there were other levies in force on farmers.

Who collected these levies?

Agricultural levies were collected by the crown in the 19thcentury but in 1935 land revenue, and therefore agricultural income taxes, were was transferred to the provinces, which became states when India attained Independence. When we adopted the Constitution, agriculture was kept in the concurrent list, which allows states to make laws on the subject. Therefore states have always had the right to tax agriculture.

How many people pay income tax in India?

Only 39 million Indians out of a population of 1.2 billion pay income tax. That's no more than 6 per cent of the population.

How many claim IT exemption for agricultural income?

More than 400,000 taxpayers claimed exemption for agricultural income in the assessment year 2014-15.

Which company claimed the highest exemption?

Corporate seed company Kaveri Seeds reported a profit of 215 crore and sought exemption on Rs 186.63 crore. 

Which multinational company claimed IT exemption for farm income?

Monsanto India, claimed Rs 94.40 crore as exemption from income tax. 

Can a corporate company claim IT exemption for farm income?

The exemption clause in the Income Tax Act allows exemption to any entity, individual or corporate company, on income earned from agricultural land. Agro-companies are allowed tax relief under the same clause.

Doesn't the government know about this?

It does. In 2014, the Tax Administration Reform Commission said "farm income is exempt from taxation in spite of large agricultural holdings and a large number of rich farmers, who earn more than salaried employees in the cities, get away with paying no tax at all in view of the government’s lack of will to consider an agricultural tax."

If states can tax farm incomes, why don't they?

The did and some six states still have laws that enable them to do so. Uttar Pradesh introduced agricultural income tax in 1948, and repealed it in 1957. Five other states did similar flip flops because farm income tax was difficult to administer and yielded little revenue to the state. Further farm taxes were oppressive under the British and popular unrest over farm levies fuelled the freedom movement.

The antipathy to taxing farm incomes, even of rich farmers carried over into free India.

Why is farm income taxation politically sensitive?

In independent India, much of the political leadership in the first five decades came from the landowning classes. So it follows that lawmakers would not act against their own interests.

Are even commercial plantations exempt from income tax?

No, in many states plantations are taxed. But there are great variations from state to state and commodity to Assam taxes on tea-cultivation income but not coffee. Coffee pLantations in Kerala are taxed at 50% while Tamil Nadu does not.

So if Bibek Debroy's proposal is accepted, how can the Centre step in?

States will have to pass a resolution under Article 252 of the Constitution authorising the Centre to impose tax on agricultural income. The taxes collected by the Centre can be transferred to the states, said the 2014 tax administration reform report.

If a tax is indeed imposed on farm income, how much is it likely to be?

The tax reforms committee proposed a tax-free limit of Rs 5 lakh on agricultural income. Farmers with incomes around Rs 50 lakh could be taxed, it said. 

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