Debate on taxing Bharat's agricultural income
GS 3 - Economy
The history of taxing agriculture
The history of agricultural taxation in India can be traced back to the 19th century and has gone through several phases. Overall, agricultural taxation in India has seen periods of inclusion and exclusion of agricultural income from income tax, with the rationale often tied to the existence of land revenue as a major agricultural tax. The shift in authority to impose taxes on agriculture to provincial governments in 1935 further decentralised the taxation system in the country.
Here's a summary of the key developments:
- 1860: Agricultural taxation was first introduced in India in 1860. This tax is applied to income from all sources, including agricultural income. Even though agricultural income was subjected to high taxation through land revenue, it was still included under this income tax. However, this tax was active for only five years and was later repealed.
- 1886: In 1886, a new income tax was imposed, but this time agricultural income was excluded from its purview. The reason behind this exclusion was that agriculture was already subject to a significant tax in the form of land revenue. This exemption for agricultural income has remained in place ever since.
- Indian Taxation Enquiry Committee, 1925: In 1925, the Indian Taxation Enquiry Committee made an effort to reconsider the exemption of agricultural income from income tax. The committee observed that there was no historical or theoretical justification for continuing to exempt agricultural income from income tax. However, this recommendation did not lead to any immediate changes in the taxation of agricultural income.
- Government of India Act, 1935: In 1935, the Government of India Act was enacted, which shifted the power to impose taxes on agriculture from the central government to the provincial governments. This change gave provincial governments the authority to determine the taxation policies related to agriculture within their respective territories.
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Constitutional Protection and Taxation of Agricultural Income Exemption Under the Income Tax Act: Under Section 2(1A) of the Income Tax Act, agricultural income is currently exempt from income tax at the national level. Taxing Income Other Than Agricultural Income: The Indian Constitution, in its seventh schedule, defines the allocation of powers and functions between the Union and the States. In the Union List, specifically entry 82, it grants the power to the central government to impose taxes on income other than agricultural income. This means that the central government has the authority to tax non-agricultural income. Power to States: In contrast, the Constitution also provides powers to the States in the State List to levy taxes on agricultural income. This constitutional arrangement implies that the decision to tax or not to tax agricultural income falls within the jurisdiction of individual State governments. As a result, it is up to the State governments to determine whether agricultural income should be subject to taxation. Current State of Agricultural Taxation: Currently, only a handful of States in India have enacted agricultural tax legislation. These states include Kerala, Tamil Nadu, Assam, Bihar, West Bengal, and Odisha. However, the implementation and scope of these agricultural tax laws can vary significantly from one state to another. Diverse Taxation Practices: It's important to note that while staple food grains are often exempted from agricultural taxation, some States continue to tax horticultural crops and plantations, as these are considered commercial crops rather than subsistence agriculture. This constitutional framework and the divergence in state-level practices highlight the complex issue of taxing agricultural income in India, with decisions resting largely in the hands of individual State governments. |
Arguments in favour
The rationale for not taxing agricultural income in India can be understood through various factors and considerations:
- Economic Burden on Poorer Farmers:
- Small and marginal farmers often have very low incomes, and their earnings may be just enough for subsistence living.
- Imposing taxes on such farmers would further burden them economically, potentially pushing them deeper into poverty.
- Income-Expenditure Gap:
- Many farmers in India struggle to meet their basic needs due to the income-expenditure gap.
- Taxing their limited income would exacerbate their financial challenges.
- Limited Revenue Potential:
- The vast majority of agricultural assets are owned by small and marginal farmers.
- Taxing agricultural income would affect only a small percentage of farmers, making it unlikely to generate substantial tax revenue for the government.
- Credit Access for Farmers:
- Imposing agricultural taxes could reduce farmers' access to credit.
- Lenders may be less willing to extend loans to farmers if they have to pay taxes, potentially limiting financial support to only those farmers with higher incomes.
- Lack of Documentation and Record-Keeping:
- Many small-scale farmers lack the education and awareness to maintain proper documentation of their land and agricultural activities.
- Tax compliance would require systematic record-keeping, which could be challenging for such farmers.
- Income Fluctuations:
- Agricultural income is highly susceptible to fluctuations due to factors like weather, disease, and pests.
- Taxing such income may not account for the unpredictability of farming and could create financial instability for farmers.
- Impact on Farmer Suicides:
- India has witnessed a distressing trend of farmer suicides, often linked to financial stress, debt, and low agricultural productivity.
- Imposing agricultural taxes could potentially exacerbate these issues, leading to a higher risk of farmer suicides as they struggle to meet tax obligations in the face of economic challenges.
Arguments against
The arguments against taxing agricultural income in India are as follows:
- Growth and Farmer Welfare: The relative contribution of agricultural income to India's GDP has been decreasing, suggesting that the agriculture sector has not been growing as robustly as other sectors. However, it's important to note that the overall condition of farmers has improved since the late 19th century when agricultural income was first excluded from taxation. While challenges persist, the situation is not as dire as it once was.
- Laundering of Non-Agricultural Income: There is a concern that agricultural income is being misused as a means to convert illegal or "black" money into legitimate or "white" currency. Politicians and individuals reportedly exploit the agricultural income exemption to evade taxes. This misuse is not limited to individual farmers; even the corporate sector has been accused of exploiting this loophole, thereby facilitating tax evasion.
- Fraudulent "Farmer" Certificates: The process of issuing "farmer" certificates, which determine eligibility for agricultural income exemptions, lacks credibility in some cases. This lack of transparency and accountability can further facilitate tax evasion and misuse of the agricultural income exemption.
- Recommendations for Taxation: Various committees and commissions have recommended the taxation of agricultural income in the post-independence era. These recommendations are based on the belief that taxing agricultural income would help generate additional revenue for the government and promote tax fairness.
- Political Considerations: Farmers constitute a significant portion of the Indian population and wield substantial political influence. Introducing agricultural income taxation could potentially alienate this large and influential voter base. Governments are often reluctant to risk upsetting such a crucial demographic, as it could impact their electoral prospects.
Way Forward
The issue of taxing agricultural income in India is complex and involves various considerations. To move forward, policymakers should consider the following points:
- Balanced Approach: Striking a balance between expanding the tax base and protecting the economic well-being of small and marginal farmers is essential. Policymakers should aim for a nuanced approach that addresses both concerns.
- Threshold-Based Taxation: One possible solution could involve implementing income thresholds for taxation. This would ensure that only those with relatively higher incomes in the agricultural sector are taxed, while smaller farmers remain exempt.
- Transparent Certification: Ensure transparency and accountability in the process of issuing "farmer" certificates to prevent misuse and tax evasion.
- Policy Review: Continuously review and assess the impact of taxation policies on farmers' welfare, economic growth, and tax revenue generation.
- Public Awareness: Promote awareness among farmers about the potential changes in tax policies and their implications, fostering informed participation in the decision-making process.
Conclusion
The issue of taxing agricultural income in India is indeed a complex and multifaceted one, with valid arguments on both sides. On one hand, proponents of agricultural taxation argue for expanding the tax base and curbing tax evasion by bringing more individuals, regardless of their occupation, into the tax net. They believe that income taxes should be paid by those whose earnings exceed a certain threshold, with exemptions based on income level rather than occupation.
On the other hand, opponents of taxing agricultural income stress the importance of protecting the economic well-being of small and marginal farmers. They argue that these farmers, who constitute a significant portion of the agricultural workforce, already face numerous challenges, including low and volatile incomes, limited access to credit, and a lack of proper documentation. Taxing their meager incomes could further worsen their financial conditions and hinder their ability to sustain their livelihoods.
The debate over whether to tax agricultural income in India involves considerations of both economic and social factors. It raises questions about revenue generation, tax fairness, and political implications. Ultimately, the decision to implement agricultural taxation in India will require careful deliberation and a nuanced approach that balances the need for revenue with the welfare of the farming community and the broader tax base expansion objectives. It remains a challenging issue that demands thoughtful policy consideration.
