The Prime Minister has said that he will not hesitate in pushing tough reform measures to curb black money. Taxing agriculture income, which requires a constitutional amendment, could be a test case in this regard.
Given that finance minister Arun Jaitley chose to reject the idea of taxing agricultural income despite chief economic advisor Arvind Subramanian’s suggestion in the last year’s Economic Survey to tax well off in the agricultural sector — it is highly unlikely that the government would agree to the NITI Aayog advice in its three-year action agenda of reviewing the tax exemption on agriculture income, in a hurry.
But, that may not be a good idea. The Parliamentary Standing Committee on finance has also raised the alarm on the need to prevent agricultural income from becoming an escape route for unaccounted money holders post-demonetisaton.
The NITI Aayog has now pointed out that as the relief is being misused by the non-agricultural entities to accumulate black money, the loophole must be plugged by taxing agriculture income beyond a threshold.
The biggest problem with taxing the agricultural income is that besides being a hugely politically sensitive issue, it requires a Constitutional amendment as the taxation of the income from agriculture is a subject falling under the states’ domain, which has ensured that out of the 25 crore households in the country, 15 crore are not paying taxes as they are agriculturist households.
This clearly means that for any major reform in the income tax structure, with 85% of the economy outside the tax net, for lowering the income tax burden of those paying taxes, as promised by prime minister Narendra Modi; along with the restructuring of the income rates and slabs with the reduction in exemptions as suggested by the Direct Taxes Code 2009, rich farmers and landlords should also be made to pay tax now.
The Goods and Services Tax (GST) has in fact paved the way for such a beginning. Keeping those leasing out farmlands on rent or share cropping and food processing companies taking land for farming out of the tax exemption, the tax legislation has restricted the definition of agriculturists.
According to the GST law: “agriculturist” means an individual or a Hindu Undivided Family who undertakes cultivation of land— (a) by own labour, or (b) by the labour of family, or (c) by servants on wages payable in cash or kind or by hired labour under personal supervision or the personal supervision of any member of the family.
The Income Tax Act through section 10(1) exempts agricultural income from tax and it includes, “(a) Any rent or revenue derived from land which is situated in India and is used for agricultural purposes. (b) Any income derived from such land by agriculture operations including processing of agricultural produce so as to render it fit for the market or sale of such produce. (c) Any income attributable to a farm house subject to satisfaction of certain conditions specified in this regard in section 2(1A)”.
This needs to change. Even though the result of the taxman’s investigation of 2,517 cases from a list of 2,746, involving agricultural income of more than Rs one crore during FY08-FY16, shared with the standing committee on finance, brought out that the huge agriculture income in the Central Board of Direct Taxes records were primarily due to the data entry errors – it was actually Rs 1,395 crore and not Rs 4,31,617 crore – it clearly indicates that the parliamentary panel is right in apprehending that this window is being utilized for black money accumulation.
Considering the high-pitched crusade of PM Modi against black money and his willingness to go for politically tough reforms, he would do well by convincing finance minister Arun Jaitley to change his stance on taxing agriculture income.