A hot potato called Taxing Agri Incomes

The most sacred of all financial cows - taxing agricultural incomes in India - is coming under sharp focus.


A hot potato called Taxing Agri Incomes

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  1. Keeping quiet : In India, politicians and policy-makers have studiously avoided even discussing the issue of taxing agricultural incomes as it is a politically charged topic. This has led to severe inefficiencies and problems in tax administration of the country, which faces a severely poor Tax to GDP ratio.
  2. Sticking the first neck out: NITI Aayog member Bibek Debroy recently suggested that agricultural income above a certain threshold should be taxed. This started a debate, and Debroy’s stand is backed by CEA Arvind Subramanian also. The political reaction was swift and predictable! The fragmented landholdings structure and consequent poverty has
  3. Which states have the law? Currently, six states – Tamil Nadu, Kerala, Assam, Bihar, Odisha and West Bengal – have   agricultural tax legislation on books, though implementation varies substantially, from no tax to tax on plantations only.
  4. Historical record: 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”. This observation holds true 90 years later as well!
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  6. Exemptions, exemptions, exemptions: Yoginder K. Alagh’s analysis of agricultural tax yield shows a substantial rise in revenue. Planning Commission’s sample study of cooperative farms showed the onset of tax avoidance as mechanized farms with hired labour took advantage of the exemption. In 2014-15, nine of the top ten claimants for tax exemption of agricultural income were corporations, whereas the tenth was a state government department.
  7. Attempts have been made: There is a robust history of policy reform attempts. The 1972 Raj committee (Chairman Dr. K N Raj) on taxation on agricultural wealth and income report is 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.
  8. Old attempts! The reform attempts go 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. The recent attempt is Prime Minister Narendra Modi’s conference with tax administrators in June 2016 when the administrators brought up the issue of taxing agricultural income. Taxing agricultural income will definitely not be easy.
  9. Technical suggestions: In 2004, a 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 payment in cash or kind and a lack of standard account-keeping throw up barriers. Rajaraman suggests a crop-specific levy on land rather than on self-declared output, with the added incentive of tax yields being ploughed back into agricultural infrastructure.
  10. TARC report 2014: The massive irregularities in agricultural income go beyond the foregone revenue. The 2014 Tax Administration Reforms Commission report points out that agricultural income of non-agriculturists is being increasingly used as a conduit to avoid tax and for laundering funds.
  11. Time has come! With the Modi government’s push for a less-cash economy and the proscription of cash transactions of over Rs.2 lakh, both making money laundering via the agricultural sector more difficult, this is a better time.

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Bodhi Booster: A hot potato called Taxing Agri Incomes
A hot potato called Taxing Agri Incomes
The most sacred of all financial cows - taxing agricultural incomes in India - is coming under sharp focus.
Bodhi Booster
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