Given its political sensitivity and the fact that the Constitution doesn’t give the central government this power, it is not surprising that finance minister Arun Jaitley should rush to clarify that no income tax was going to be levied on agriculture. Jaitley’s clarification, in turn, was a response to a statement made by NITI Aayog member Bibek Debroy on how, apart from removing the plethora of exemptions across direct and indirect taxes, the government also needed to tax agricultural income beyond a certain level. A similar suggestion was made by the Economic Survey last year when it said reasonable taxation of the better-off—regardless of whether they got their income from agriculture—would also help build legitimacy.
While Jaitley can say the government is not planning to tax agriculture, the problem is that several cheats use this window to dodge taxes. There have been, on occasion, stories in the media of individuals whose agriculture income couldn’t possibly be as large as was stated since they didn’t own enough land to yield such revenues. How rampant this practice is, amazingly, is something the tax department doesn’t have much information on. This was best brought out, last December, by the report of the standing committee on finance which spoke of ‘missing taxpayers’, among others—it cited the Economic Survey which said that, had income tax thresholds not been increased as much as they had been, India’s tax-to-GDP would have risen 0.32ppt. The report focused on taxpayers who claimed large farm incomes and recommended the genuineness of this be checked. In 838 cases between FY07 and FY15, it found that while the verified agricultural income was Rs 1,395 crore, that entered was Rs 4,31,617 crore—whether this was done due to a data entry error by the assessing officer or the taxpayer was not clear; the committee has asked for a report on this. So, to begin with, the taxman needs to investigate agricultural income tax-filings to determine how genuine they are—reference per-acre revenues can be provided to the taxman as well to help the investigation process.
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The new income tax law that proscribes cash transactions of more than Rs 2 lakh will help since all those declaring large farm incomes will have to have legitimate receipts and cheque payments—for inputs as well—to show this is genuine. Over the years, courts have defined what is agricultural income, so that has made Jaitley’s job easier—for instance, a Pepsi growing tomatoes is agricultural income but converting this to ketchup is not. It is not clear whether the proceeds from land given on rent/lease for agriculture are to be tax-exempt—while the Income Tax Act seems to treat this as exempt income, there are court judgments that say it is not; the GST Act has, for its purpose, excluded such income from the definition of agriculturist.
Given India has 11-12 crore cultivators and just 6.44 crore income tax payers, at some point, Jaitley will have to look at whether the government should expend political capital in trying to get the power to levy income tax on them—last year’s Survey found that just 15% of personal income of households was reported to tax authorities, though it does not say how much of this was due to agriculture. All of that, though, is in the future. For now, just finding ways to prevent tax cheats from overstating agriculture income has to be Jaitley’s priority.