As Budget 2026 is only weeks away, there is bound to be intense speculation about what it entails for important sectors of the economy like agriculture. To be sure, every Budget prioritises this sector—that contributes 17% of the economy’s gross value added and supports less than half the population—as an engine of growth but outlays represent a shrinking share of total expenditures. Budgeted outlays also do not keep pace with inflation. Clearly, more resources need to be allocated to boost the sector’s productivity and resilience at a time of climate change.
Taxation of agricultural incomes, which has often been deliberated upon in the past, could indeed provide the needed resources to support this all-important sector on a sounder footing. Unfortunately, the very mention of agricultural taxation raises red flags regarding its feasibility especially when all political parties fiercely compete to win state and national elections. The feeling clearly is that powerful vote banks of farmers are unlikely to provide support if taxation of their incomes is on the agenda. They even forced the ruling dispensation to backtrack on three farm reform bills.
Prosperity Paradox
Interestingly, the late economist Bibek Debroy, who headed the Prime Minister’s Economic Advisory Council, raised the question why taxation of agricultural incomes raised political temperatures only from the late 1970s onwards while previously it was generally accepted. According to him, as the Green Revolution spread, the political clout of the vanguard sections of surplus-producing farmers in the geographically contiguous regions of Punjab, Haryana, and western Uttar Pradesh rose tremendously.
Perversely, therefore, agricultural prosperity rather than agrarian distress led to the proposal of taxation being relegated to the backburner. The time has come to seriously consider taxing agricultural incomes above a certain threshold as the sector is expected to be an important part of India’s journey to become a developed nation by 2047. The blueprint on how to go about it is available in various reports like the KN Raj Committee on Taxation of Agricultural Wealth and Income (1972), Kelkar Task Force on Direct Taxes (2002), White Paper on Black Money (2012), and Tax Administration Reform Commission (2014).
As agricultural incomes are exempt from taxation under Section 10(1) of the Income Tax Act, 1961, and the sector is a state subject, there are obviously some legislative changes needed for this issue to be a part of the Budget. The various committees have highlighted anomalies like the violation of horizontal and vertical equity principles—individuals with similar incomes should be taxed equally and those with higher financial capacity pay more—and laundering of non-agricultural income as agricultural incomes. So, the principle should be that taxes must be paid if one’s income is above a threshold, irrespective of whether one is a farmer.
Leveraging AgriStack
To pursue this vital issue, the ruling dispensation has all the data needed if it really wants to do so—like the AgriStack with data it has been gathering from 77.3 million farmers since 2014 to determine the substantial farmers who can be taxed as they have incomes above a threshold. Resources from such taxation will bolster outlays for agriculture to enable the Centre and states to build infrastructure like irrigation and water management facilities to minimise dependence on a wayward southwest monsoon. More spending on research and development will also be possible to develop heat-resistant crops for a more climate-resilient and productive agriculture.