The issue of agri tax exemption

Source: This post ‘The issue of agri tax exemption’ is created based on the article Tax reforms: India’s agricultural income exemption needs a rejig, published in Indian Express on 19^th July 2024.

UPSC Syllabus Topic: GS Paper 3 – Agriculture – Agriculture sector reforms

News: Agricultural income is currently exempt from tax, which has become a conduit for tax evasion and money laundering, especially by non-agricultural entities.

What is the rationale behind giving agriculture tax-exemption?

First, the exemption is based on the constitutional provision that only states can legislate on agricultural income.

Second, agriculture is a high-risk profession with small landholdings, making tax exemption justifiable for most farmers.

What are the issues of giving tax-exemption to agriculture?

Reports indicate that many non-agricultural entities and high-income individuals exploit this exemption. For instance, in a CAG audit of tax returns, many claims were allowed without proper verification, and substantial exemptions were given to corporate entities.

While government has not provided the easy exemptions to other sectors, even after demands by the sections, agriculture is continuously getting the exemption.

What can be done?

Long term measures: Implement a proper tax regime for agricultural income, with thresholds to protect small farmers while addressing large-scale abuses.

Just like GST reforms, cooperative federalism can play a positive role in the agri sector reforms as well.

Immediate measures:

1) Restrict agricultural income tax exemptions for companies.

2) Scrutinize high agricultural income claims (above ₹10 lakh, ₹50 lakh, and ₹1 crore) to identify high-risk cases.

3) Consider removing exemptions for agricultural income above certain thresholds (e.g., ₹50 lakh or ₹1 crore) to reduce inequity.