Why agricultural income is to be taxed?

India doesn’t impose tax on agricultural income. As per Constitution, the right to impose tax on agricultural income lies with states. But given the dominance of small and marginal farmers and only low income from farming, the prospects of agricultural income tax is low. Nearly 90 per cent of the farmers have a farm holding of less than 2 hectares.

More than that, the administrative difficulty, unorganized nature and potential for conflict between the tax administration and tax payers – all these have made agriculture exempted from income tax.

At present, only few states have plans for taxing agricultural income. States like Kerala and Tamil Nadu imposes nominal tax on plantations sector.

As per the present tax laws, Section 10(1) of the Income Tax Act instructs that agricultural income earned by the taxpayer in India is exempt from tax. At the same time, the income is to be reported for computational purposes. The tax payer has to keep land records while claiming the exemption.

Why agricultural income tax on the big income earners is needed?

There is large number of non-agricultural income holders who enjoys tax exemption for their income from agriculture. Income from other sources are often shown as income from agriculture as a tax evasion technique. Non-taxation of agricultural income is covertly used by several corporate to evade taxes. This is why agricultural income tax is proposed to check evasion.

A widescale imposition of agricultural income tax is neither possible or feasible. Still, there are several sound arguments for imposing agricultural income tax on a selective basis. Direct revenue from agricultural income tax may be low, but the accretion to tax revenue from checking evasion may be substantial.

The Tax Administration Reform Commission in its Third Report (2014) observed that non-taxation of agricultural income promotes tax evasion: “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.”

“Even a large number of rich farmers, who earn more than salaried employees in the cities, get away with paying no tax at all in view of the government’s lack of will to consider an agricultural income tax.” – observed the TARC.

The TARC also argues for imposing agricultural income tax on a selective basis by focusing on rich farmers. “…taxation of select agricultural income of large farm income setting aside small farmers below a high threshold could nevertheless enhance the taxpayer base.”

Recently, NITI Ayog member Bibek Debroy, argued for agricultural income tax. Here, Debroy cited Vijay Kelkar’s demand for imposing agricultural income tax. “In 2002, the Vijay Kelkar Task Force on direct taxes made the point that not taxing agricultural income violates horizontal and vertical equity and it “encourages laundering of non-agricultural income as agricultural income, that is, it has become a conduit for tax evasion”.

To tackle the problem, some sort of a taxation of higher income earners from the agricultural sector is needed.