|Demand of the question
Introduction. Contextual introduction.
Body. Discuss why rich farmers should be taxed in India and various challenges.
Conclusion. Way forward.
Agriculture employs about 50% of the population contributing approximately 17% to the GDP of the country. According to Indian Constitution, agriculture and the taxation of agricultural incomes has been a state subject. Accordingly, section 10(1) of the Income Tax Act, 1961, exempts agricultural income from taxation by the central government. This has led to rich farmers and landlords immune from the tax net.
Why should rich farmers be taxed in India?
- Tax shelter: The agriculture sector has long acted as a tax shelter. While many experts, over the years, have demanded closing of this loophole, no step has been taken by any government.
- Money laundering: As the 2014 Tax Administration Reform Commission report points out, agricultural income is being increasingly used as a conduit to launder money. Agriculture exemptions are used to route black money by non-agricultural entities.
- Equity in taxation: In 2002, Vijay Kelkar Task Force on direct taxes reported that not taxing agricultural income violates horizontal and vertical equity. In other words, there is no point in leaving rich farmers out of tax and taxing others.
- Better subsidies: Adequate tax data would help the Government to identify the small and big farmers by which the targeted subsidy schemes in future can be rolled out to benefit the needy.
- Revenue: The latest National Sample Survey revealed that 70% of agricultural households in India have marginal holdings (under 1 hectare), and only 0.4% hold over 10 hectares. Just by taxing the incomes of the top 4.1% of agricultural households, at an average of 30%, as much as Rs 25,000 crore could be collected as agricultural tax.
- No benefit to small-scale farmers: It’s true that agriculture is the main source of income for the majority of the rural Indian population. But the small-scale farmers have been barely impacted by the tax exemptions under the Indian Income Tax Act, wealthy farmers have reaped the benefits by abusing them.
- Political will: Many states may have been reluctant to tax agriculture incomes as they do not wish to lose vote bank of farmers. Moreover, India’s state legislatures have typically been populated by land owners who have been blocking efforts to impose a tax on themselves.
- Cash transactions: In India in particular, agriculture is harder to tax as it is based largely on cash transactions which are hard to track and trace. Cash transactions not routed through the banking system are difficult to verify and be used for assessment of agricultural incomes.
- Burden small farmers: In a country where 83% of the farming community comprises small and marginal farmers. Many farmers do not hold land and work on contract. Rich farmers would pass on the burden of tax on these farmers.
Niti Aayog member Bibek Debroy recently said that agricultural income should be taxed. In its three-year action plan, Niti Aayog had also recommended taxing agricultural income. The prudent path would be to amend the definition of ‘agricultural income’ under the tax laws, and impose an appropriate monetary threshold after careful deliberation and study.