Note- In our last years Mains test series, we gave a question related to taxing agricultural income, although the question was not asked by UPSC last year, still it is one of the most debated topic in policy circles. The below article gives reasons on why it should be taxed.
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.
NITI Aayog member Bibek Debroy’s suggestion last week that agricultural income above a certain threshold should be taxed is a case in point. The political reaction was swift and predictable, from both the government and the opposition. But Debroy’s stand—backed by chief economic adviser Arvind Subramanian—is no heterodoxy.
Six states currently have agricultural tax legislation on the books—Tamil Nadu, Kerala, Assam, Bihar, Odisha and West Bengal—even if implementation varies substantially, from taxes not being levied at all to being levied only upon income from plantations. A number of other states such as Uttar Pradesh and Rajasthan have flip-flopped on the issue over the decades, introducing and then rolling back agricultural tax.
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.
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 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.