The Statesman: New Delhi: Saturday, November 25, 2017.
In March
2016, in response to an RTI application, the Income Tax Department revealed
that agricultural income earned by the 6.57 lakh assessees, who had filed
returns in 2011, stood at nearly Rs 2,000 lakh crore. This was more than 20
times the country’s Gross Domestic Product of over Rs 84 lakh crore in that
year. Subsequently, however, in January 2017, it clarified that the shocking
figures were primarily due to data-entry errors, an assertion that is yet to be
verified. But even extrapolation of the reduced income for all the identified
cases implies that more than Rs 4000 crore of agricultural income were lying
outside the tax-net.
Agriculture
is exempt from income tax, under Section 2(1A) of the Income Tax Act which
defines agricultural income as rent/revenue from land, income derived from this
land through farming, and income derived from buildings on that land. Further,
unless there is specific entry on tax in the Union or State List under the
Seventh Schedule of the Constitution, no tax can be imposed by the Centre or
the State government. The tax on agricultural income is listed under the State
List (Entry 46), and hence the Central Government cannot tax such income. As
such, Section 10 (1) of the Income Tax Act, a Central Act, excludes
agricultural income from the computation of total income. Read with Section
2(1A), it implies that farmers who have no other sources of income are not
required to file income-tax returns. It is only those farmers who derive income
from sources other than agriculture who are required to file returns. If their
agricultural income exceeds Rs 5000, and their total income is otherwise
taxable, the agricultural income is to be added to the total income only for determination
of their appropriate income-slab for charging of tax, but no tax will be
imposed on the income derived from agriculture.
Any decision
to tax agricultural income by the Centre will require an amendment to the
Constitution. For that a “taxing entry” needs to be inserted in the Union List
and appropriate changes should be made in Part XII of the Constitution, dealing
with finances of the Union and the States. Of course, states have to be
involved in the process, as presently they only can impose such a tax. It will
be foolish to expect that states, already reeling in the face of agitations by
farmers, will take the plunge. For the Centre, it will be a contentious issue,
with different lobbying groups trying to protect the interests of the big farmers.
But the danger of avoiding or postponing this will spell doom for the economy
and defeat the Government’s earnest attempts to eliminate black money, as the
untaxed agriculture sector will continue to absorb black money. It is also
extremely unfair from considerations of equity and simplification of the tax
administration.
In June 2016,
at the Rajasva Gyan Sangam, an annual conference of tax administrators, a
suggestion was advanced to the Prime Minister “on the need to target farmers
with non-agricultural income above a certain threshold, an idea that was
pitched as a low-hanging fruit that could potentially bolster ongoing efforts
to widen the country’s taxpayer base.” Of the 25 crore taxpaying households in
the country, 15 crore households are designated as agriculturalists and the
remaining 10 crore are non-agriculturalists, according to estimates produced at
the conference. Even earlier, several committees appointed by the Government
had warned about the pitfalls of not taxing the agriculture sector.
The K N Raj
Committee (1972), Tax Reforms Committee (1991), Task Force on Direct Taxes
(2002), Tax Administration Reform Commission (2014) had all recommended
taxation of agriculture to plug the loopholes for evasion and for the
laundering of tax-evaded money. Despite pointing out the inherent inequity in
exempting rich farmers earning more than salaried employees, nothing really has
happened.
Actually, it
is not even something unprecedented; agricultural income used to be taxed in
India till 1886 when it was abolished. Income from tea, coffee and rubber
plantations are taxed even now under Rules 8, 7A and 7B of the Income Tax
Rules, 1962. But agriculture being the holy cow of the economy, any proposal to
bring the sector as a whole under the tax net has always met with the strongest
disapproval from the farmers’ lobby and the Government on the consideration of
loss of vote-banks.
The vote-bank
consideration is based on myth. Even if the sector is brought within the tax
net, it is only a miniscule percentage of the total number of agricultural
workers who would be affected. Even at present, hardly 2 per cent of the
assessees declare any agricultural income. Even if small and marginal farmers
are taxed, their income will be well below the tax threshold.
From the
Agricultural Census and 2011 population census, we can estimate that the number
of small and marginal farmers at 118 million (93 million marginal, 25 million
small). They account for about 93 per cent of the total farmers in the country
and together hold 45 per cent of the total area under cultivation. The
remaining 7 per cent of the farmers, who share between them 55 per cent of the
total cultivable land, would be the target group for any future tax on
agriculture. They certainly do not constitute a major vote-bank, though their
voice may be loud enough for any political party to yield to their demands for
continued exemption. The agriculture sector contributes only 16 per cent to our
GDP. Its growth has been stagnant, the percentages during 2012-13 to 2016-17
being only 1.5, 4.2, 0.2, 1.2 and 4.1 respectively. No significant capital
investment has been made in agriculture during the past decades.
According to
the Situation Assessment Survey of Agricultural Households conducted from
January 2013 to December 2013, the average monthly income per agricultural
household was estimated as Rs 6426. The net receipt from farm business
(cultivation and farming of animals) accounted for about 60 per cent of the
average monthly income per agricultural household. The average monthly
consumption expenditure per agricultural household was Rs 6223, while the
income was Rs 6426. Only for the large farmers holding more than 10 hectares of
land, the income was Rs 41,388 per month, above the income tax threshold. These
data show that only the large famers who account for a miniscule 0.70 percent
of the total operational holdings will be liable to pay any income tax. They
also have substantial non-farm income, above the tax threshold.
Even the
agro-companies growing crops are entitled to the same tax reliefs as
individuals in respect of agricultural income, which defies all logic when we
consider the scale of exemptions enjoyed by these companies. For example, more
than four lakh taxpayers had claimed exemption for agricultural income in the
assessment year 2014-15. The biggest beneficiaries were Kaveri Seeds, which
claimed Rs 186.63 crore as exemption, and multinational Monsanto India, which
claimed Rs 94.40 crore as exemption, and they respectively earned Rs 215.36
crore and Rs 138.74 crore as profits before tax. Notably, Monsanto is the
company that sells the genetically modified Bt-Cotton seeds in the country and
earns huge profits. If this is not inequitable and irrational, one wonders what
is. According to an estimate, taxing only the richest 4.1 per cent agricultural
households, as much as Rs 25000 crore could be collected as tax. Given that
only 2.6 per cent of the population paid any taxes in 2015-16 (39 per cent in
the US for comparison), and only 25 lakh paid tax at the highest rate, then 90
per cent of them are from the organised sector where taxes are compulsorily
deducted at source. If indeed we are serious about expanding the tax-base, this
hitherto untaxed sector must be brought within the tax net.
Of course given
the highly informal nature of business in this sector, tax administration will
pose serious problems initially, but that is expected of any new domain. It
should be ensured that the tax liability rests only on the shoulders of the
rich farmers while insulating the small and marginal.
In 1925, the
Indian Taxation Enquiry Committee had 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.”
After more
than 90 years, these words still ring the same. It is time for another
disruptive and structural reform in this sphere.
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