Taxing Agricultural income

GS3 – Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment

GS3 – Inclusive growth and issues arising from it. 

GS3 – Money-laundering and its prevention

 Context

• Niti Aayog member Bibek Debroy recently said that agricultural income should be taxed, an idea that the central government said is not under consideration at all.
• In its three-year action plan, Niti Aayog had recommended taxing agricultural income.
• Ramesh Chand, another member of the think tank, had defended the proposal saying recommendation was to plug loopholes to prevent non-agricultural entities evading tax using the agricultural exemptions.

 Three Year Action Plan

• Apart from the action agenda, there would be a seven-year strategy and a 15-year long-term vision that will replace the erstwhile Five-Year Plans for the nation’s planning framework. The 12th Five-Year Plan ended on 31 March.
• Prime Minister Narendra Modi said the action agenda was just a draft and that all suggestions by the chief ministers of various states would be taken into account before finalising it.
• 15-year vision document pegs the Indian economy’s growth from Rs 137 lakh crore in 2015-16 to Rs 469 lakh crore by 2031-32 at 2015-16 prices.
• The three-year agenda has been divided into seven parts, with each part having a number of specific action points.
• Over 300 specific action points have been identified covering the whole gamut of sectors.
• The NITI Vice-Chairman said subsequent parts deal with major sectors, growth enablers, governance, social sectors and sustainable development.
• NITI Aayog CEO Amitabh Kant said the major take-away was that the think tank assured there was no vacuum after the 12th Five-Year plan that ended on March 31 as it quickly worked on the three-year plan.
• During NITI Aayog Governing Council’s third meeting, Kant outlined the initiatives taken in areas like agriculture, poverty elimination, health, education, digital payments, disinvestment, coastal zone, and island development.
• He said that NITI Aayog will work with states to improve basic services and infrastructure, especially in districts and regions which require specific attention.

How the issue of agriculture income tax propped up?

• Due to its exempt nature, agriculture is seen as a loophole to evade taxes. While many experts, over the years, have demanded closing of this loophole, no step has been taken by any government.
• In 2016, an RTI had surfaced indicating how rich people use agriculture tax exemptions to convert black money into white.
• Agriculture exemptions are used to route black money by non-agricultural entities.
• During 2010-11, agriculture income exceeded gross domestic product 20 times. During this period, agricultural production and area under cultivation remained almost constant.
• In 2011, agricultural income of close to Rs 2000 lakh crore was registered for around 6.57 lakh assesses.
• Between the period of 2011-12 to 2013-14, assesses reported agricultural income of more than Rs 1 crore.
• Only 2 percent of tax assesses declare agricultural income.
• There was a rise in agricultural income during the same time when the government had initiated black money probe in foreign accounts.
• Between 2007-08 and 2015-16, around 2746 entities including individuals declared agricultural income of minimum Rs 1 crore.
• According to records, more than 90 percent of the agricultural land is under marginal farmers who do not file returns.
• Contrary to the above figures, agricultural growth in India usually hovers around 3-4 percent. Agriculture production, too, has remained stable at around 14-15 percent of the GDP. Consecutive droughts have also led to fall in yield and farmer suicides in the country.

 Money Laundering Via Agriculture

• 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.
• 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.
• The above data instigated a deeper look into how many people were using agricultural tax exemption for money laundering.
• People who wish to launder money obtain land at cheaper rates and do rotations of crop on the land. On just this, people pass off unaccounted cash income as agriculture income.
• In many cases, fictitious bills are shown as receipts of agricultural produce and evade tax on profits.

What has Niti Aayog proposed?

• The government’s think tank in its three-year plan suggests that farm income could be assessed for tax as a three-year average. This will not help reduce evaders, but it will widen the tax-base for the government.
• “On the personal income tax side also exemption should go. On expanding the base on the personal income tax side, other than elimination of exemptions, is to also tax the rural sector, including agriculture income above certain threshold.” Said Debroy
• Excluding income from farming – which is nearly 15 percent of the GDP –forces the government to keep income tax rate high. Taxing farm income could add 0.6 percent to the GDP, according to National Institute of Public Finance & Policy.
• The tax on farm income can be applied above a threshold just like it is done with personal income. At present, personal tax is levied on income above the threshold of Rs 2.5 lakh.
• However, Niti Aayog, too, distances itself from Debroy and said the comments were his personal opinion and not any recommendation by the body.
• In India, taxing farm income is the domain of states. Farm income is not taxed except on income from certain non-farm activities.

How the states respond to agri tax?

• 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.
• 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, as is mentioned of an agricultural income tax, there can be only two conclusions: some states tax agricultural income, or that state legislatures has the right to tax agricultural income.
• 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.
• In 1932, there was the Federal Finance Committee of the Round Table Conference and its report. The present constitutional structure owes to this report and the Government of India Act (1935).
• 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).
• 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).
• 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.

Historicity of the issue

• 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.
• The Fourth Five Year Plan (1969-74) document and the report of the Fifth Finance Commission (1969) also talked about agricultural tax.
• 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).
• 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.
• In 1925, the Indian taxation enquiry committee noted, “There is no historical or theoretical justification for the continued exemption from the income tax of income derived from agriculture.
• There are, however, administrative and political objections to the removal of the exemption at the present time.” Almost a century later, both parts of that observation still hold true.

Final arguments in favour

• The economic and governance necessity of such a tax has always been apparent.
• Yoginder K. Alagh’s 1961 analysis of agricultural tax yields,Case For An Agricultural Income Tax, in The Economic Weekly—now The Economic And Political Weekly—is illuminating, showing a substantial rise in revenue over the previous decade, vital for a young nation state.
• Concurrently, the Planning Commission’s sample study of cooperative farms showed the onset of tax avoidance as mechanized farms with hired labour took advantage of the exemptions provided to cooperative farms.
• That evasion has grown over the decades into an administrative swamp. In assessment year 2014-15, for instance, nine of the top 10 claimants for tax exemption of agricultural income were corporations; the 10th was a state government department.
• And an RTI (right to information) query by Vijay Sharma, former income-tax chief commissioner, turned up massive irregularities in agricultural income in 2011-12 and 2012-13.
• This goes beyond foregone revenue. As the 2014 Tax Administration Reform Commission report points out, “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.” Nor can this government or its predecessors hide behind the fig leaf of honest—if unwise—populism.
• According to the National Sample Survey’s 70th round, over 86% of agricultural households have land holdings of less than 2 hectares. Low-income farmers—the constituency state legislatures are ostensibly protecting—would thus fall outside the ambit of any sensible tax regime.
• The reality of political opposition is more sordid: pressure brought to bear by the rural elite that can deliver votes and funds and would fall under the tax net.
• Little wonder there is a robust history of policy reform attempts. The 1972 Raj committee on taxation of agricultural wealth and income report is perhaps the most comprehensive. The Vijay Kelkar committee in 2002 had also addressed the issue, noting that states should be persuaded to pass a resolution authorizing the Centre to pass a tax on agricultural income that would then be assigned to the respective states.
• The reform attempts stretch as far back as 1947—when the report of the expert committee on financial provisions to the Constituent Assembly suggested consulting with the states to address the issue swiftly—and are as recent as Prime Minister Narendra Modi’s conference with tax administrators in June last year when the latter brought up the issue of taxing agricultural income.
• Given the extent of the informality that still exists in the agricultural sector, implementation of an agricultural tax would admittedly not be easy.
• In a 2004 World Bank paper,Taxing Agriculture In A Developing Country: A Possible Approach, Indira Rajaraman has analysed data from 70 developing countries to show how the twin problems of payments in cash or kind and a lack of standard account-keeping throw up barriers. But there is, demonstrably, a wealth of work done in this area to draw upon.
• For instance, Rajaraman herself suggests a crop-specific levy on land rather than on self-declared output, assessed and implemented at the panchayat level for accuracy and flexibility—with the added incentive of tax yields being ploughed back into agricultural sector infrastructure.

Conclusion

• However, to engage with such policy debates, the political establishment must first move beyond a reflexive rejection of the very concept of agricultural tax.
• Given the optics created by decades of grandstanding, this will perhaps be as difficult as actually implementing a tax.
• But with the Modi government’s push for a less-cash economy and the proscription of cash transactions of over Rs2 lakh, both making money laundering via the agricultural sector more difficult, this is as good a time as any.
• It would be a pity if the logic of the colonial administration continued to dictate tax administration in India nine decades later.

Way Forward

• Agriculture employs the largest population of the country despite contributing very little to the GDP of the country. It warrants an agenda to improve its productivity so that ample utilization of resources can be done to realise inclusive growth.
• The characteristic feature of the employment and thus income is the fact that the land is apparently concentrated in the few hands despite the clamour of land reforms.
• And therefore an effective policy mechanism is required to tax the rich farmers and landlords while still keeping the small marginal ones immune from the tax net.

 Questions

1. Do you support taxing of agriculture? Give concrete arguments in support of your opinion.