Taxing agriculture

The NITI Aayog proposal to tax agriculture, despite Union Finance Minister‘s clarification that the government has no such intention, has triggered a policy debate that refuses to recede.

Arun Jaitley cited constitutional limitation for the Centre to do so as agriculture is in the state list. It’s true that under the present Constitutional assignment of tax powers in India, taxation of agricultural income is placed within the state list. But, no state has ever tried to levy a comprehensive tax on agricultural income given the influence of agricultural lobby.

Should there be a tax on agricultural income? The recent changes in agrarian economy gave further credence to the proposal to tax this sector. The shift towards commercial crops and, especially, plantations, farm houses etc., has been cited to justify taxation on agricultural income.

It’s also a fact that agriculture has been a source of parking black income as it does not attract any income tax. Besides evading tax, unaccounted income from other sources is shown under agricultural income to avoid paying taxes. Thus, agriculture has been used as a channel to legitimise and perpetuate unaccounted income.

D P Sengupta and R Kavita Rao of National Institute of Public Finance and Policy in an article in Economic and Political Weekly estimated that if agricultural incomes too were treated on par with other incomes and were made subject to income tax, it would yield potential revenue of about Rs 50,000 crore for 2007-08. It would be much higher now a decade later. Hence, the clamour for bringing agriculture into tax net. There will be substantial revenue for the states as agriculture is in the state list.

There is a growing presence of corporate sector in various activities associated with this sector. There are corporate companies reporting agricultural incomes and income from the sale of various agricultural products. The propagation of contract farming is also changing the character of agricultural operations and income from them.

Income from allied sectors like dairy, live stock, poultry etc., is also often shown as agricultural income to evade taxes. The share of allied sectors and other value-added activities in the overall agricultural income is increasing.

But, this is only a part of the story. The income from agriculture is highly inconsistent. The amplitude of fluctuation in agrarian incomes has been accentuated by the integration into global market place. The shift towards cash crops has further intensified the trend.

Computing agricultural income is fraught with many challenges. The fragmentation of agricultural land holdings has led to a situation where small and marginal farmers account for a large chunk of agrarian community.

Any income on agricultural operations that are informal in character is prone to large-scale evasion. It requires a massive machinery to collect and verify taxes on agricultural incomes.

The growing trend of tenancy farming coupled with no record of rights further complicates the process of computing agricultural incomes to arrive at taxable income.

Given the merits and demerits of agricultural income tax, at least taxing some crops or processes can be explored. Higher levels of income from cash crops can also be brought under the ambit of taxation. Income from farm houses near urban areas should be taxed.