Agricultural income taxation: Bibek Debroy presents 12 facts

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Published: May 3, 2017 5:38:44 AM

Not realising there are thresholds, irrespective of whether it is agriculture or non-agriculture, is a deliberate attempt at obfuscation.

Income Tax Act, agricultural income, agricultural income tax, Round Table Conference, Fifth Finance Commission, tax rental, RTI Not realising there are thresholds, irrespective of whether it is agriculture or non-agriculture, is a deliberate attempt at obfuscation. (Source: PTI)

Amnesia and ignorance don’t facilitate discourse, especially when indulged in by people who catapult themselves in, without being aware of present policy or its past evolution. This piece is not meant to stir the pot on agricultural income taxation further, but will state some facts. First, Section 2(1A) of Income Tax Act defines agricultural income as rent/revenue from land, income derived from this land through agriculture and also income derived from buildings on that land. Second, Section 10(1) of Income Tax Act excludes agricultural income from computation of total income. Neither of these sections is dispute-free and chartered accountants/lawyers have been enriched. But broadly, these propositions are true.

Third, conditions on sale of agricultural land vary from state to state. In some states, there is a requirement that land can only be sold to “farmers”. But not every state requires this. When there is a stipulation, there are no credible checks on “farmer’s certificates”, in addition to circumvention through the leasing route. Fourth, in Seventh Schedule, Entry 82 in Union List mentions taxes other than agricultural income, while Entry 46 in State List mentions taxes on agricultural income. Therefore, arguing this is in the State List is valid. But if I have apoplexy at the mention of agricultural income tax, there can be only two conclusions. I don’t know that some states tax agricultural income, or I am denying state legislatures their right to tax agricultural income.

Fifth, long before Income Tax Act of 1961, there was Income Tax Act of 1860, now forgotten. This was the first introduction of income tax in India (in a modern sense) and it was meant to be temporary. Wonder of wonders, it taxed agricultural income till 1886. What changed in 1886, or between 1860 and 1886? The answer had more to do with general resentment against colonial rule, less to do with agricultural income taxation directly. Sixth, in 1932, there was the Federal Finance Committee of the Round Table Conference and its report. If we have the present Constitutional structure, that’s because of this report and Government of India Act (1935).

Seventh, we have had Agricultural Income Tax Acts in Bihar (1938), Assam (1939), Bengal (1944), Orissa (1948), Uttar Pradesh (1948), Hyderabad (1950), Travancore and Cochin (1951), Madras and Old Mysore State (1955). Eighth, this isn’t entirely history. We still have Assam Agricultural Income Tax Act (1939), Bihar Agricultural Income Tax (1939), Kerala Agricultural Income Tax Act (1991), Tamil Nadu Agricultural Income Tax Act (1955), Orissa Agricultural Income Tax Act (1947), Maharashtra Agricultural Income Tax (1962) and Bengal Agricultural Income Tax Act (1944), or so I think. Unlike Karnataka Agricultural Income Tax Act (1957), repealed in 2016, I am not aware of these statutes having been repealed. Therefore, it isn’t true that states don’t tax agricultural income, though it’s true they tax some kinds of agricultural income, such as plantations.

Ninth, it isn’t as if this issue was discovered yesterday. The issue of taxing agricultural income (and wealth) goes back to 1960s. There must be a unified system of taxation across states. Agricultural income taxation must be integrated with non-agricultural income taxation. Land revenue tax hasn’t quite worked and must be replaced. There is a considerable amount of literature from 1960s and 1970s, based on such principles. To those who wonder about how an agricultural income tax will be implemented, may I suggest “Report of the Committee on Taxation of Agricultural Wealth and Income (Raj Committee)” of 1972? You don’t have to agree with the Committee’s agricultural holding tax idea, but it isn’t as if no one has thought about implementation.

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May I suggest Fourth Five-Year Plan (1969-74) document and Report of Fifth Finance Commission (1969)? Indeed, if one looks for strong arguments in favour of agricultural income taxation, one will find them in Report of Taxation Enquiry Commission (1953-54). Tenth, there can be problems with generalisation. I guess in logic this would be called fallacy of composition. Epimenides is poor. Epimenides is Cretan. Therefore, all Cretans are poor. Read farmer instead of Epimenides. Not realising there are thresholds, irrespective of whether it is agriculture or non-agriculture, is a deliberate attempt at obfuscation.

Eleventh, in 2002, there was Report of Task Force (Vijay Kelkar) on direct taxes. This made the point that not taxing agricultural income violates horizontal and vertical equity and “encourages laundering of non-agricultural income as agricultural income i.e. it has become a conduit for tax evasion. Both the arguments are empirically verifiable.” This empirical validation was done on the basis of tax returns in Mumbai. This Report proposed, “A tax rental arrangement should be designed whereby states should pass a resolution under Article 252 of the Constitution authorizing the Central Government to impose income tax on agricultural income. The taxes collected by the Centre would however be assigned to the states. Most agricultural farmers would continue to remain out of the tax net.” At that time, estimates were that 95% of farmers would be below the threshold.

Twelfth, some figures from a RTI application filed by Vijay Sharma last year reveal a lot. In 2012, 812,426 individual tax-payers disclosed agricultural income and average income per individual assessee was Rs 83 crore. (Do the multiplication, and the mind boggles.) In the assessment year 2015-16, 307 individuals reported agricultural income of more than Rs 1 crore a year. In 2014-15, a company made profits of Rs 215 crore. But claiming the agricultural income exemption, paid no tax.

Author is the member of NITI Aayog. Views are personal

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