Taxing Farm Income

In order to expand the tax base of personal income tax, Bibek Debroy, a Niti Aayog member, proposed at a press conference that besides removing tax-exemptions, we can also “tax the rural sector including agricultural income above a certain threshold.” Incidentally, even the economic survey report of 2016 opined that by taxing agriculturists the tax base can be increased significantly.

However, looking at the political sensitivity of the proposal, the Finance Minister, Arun Jaitley has been quite quick in categorically stating that the government has no plans to tax farmers. Intriguingly, he also said, “As per the constitutional allocation of powers, the central government has no jurisdiction to impose tax on agricultural income.”

For quite some time, it is being argued that excluding farm income that accounts for about 15% of India’s GDP of around $2.2 tn is what indeed compelling the government to keep personal income tax rates high. That aside, tax department often alleges that agricultural income is used as a conduit to avoid taxes by the rich, including corporates. According to the Finance Ministry reports, between 2007-08 and 2015-16, 2,746 entities and individuals declared agricultural income of above Rs. 1 cr. And no wonder if this led to heart burn among the urban-based salaried class of tax-payers, for they feel that “a large number of rich farmers, who earn more than salaried employees, get away with by paying no tax at all.”

Against this backdrop, Debroy’s/Niti Aayog’s proposal to tax farmers assumes significance, calling for a cautious examination of the proposal. First things first: Given the intrinsic vulnerability of agriculture to exogenous shocks, it is a herculean task to compute the cost of cultivation of different crops, that too, in different geographies of the country and arrive at the profits. In absence of a set criteria to define the influence of variables such as rainfall, soil type, average temperatures, incidence of pests and diseases, means of irrigation, etc., on the ultimate crop yield, it becomes difficult to arrive at an objective assessment of costs and profits.  Secondly, majority of the farmers use cattle-drawn agricultural implements in cultivating crops. Provision of depreciation under agricultural implements and cattle is a tricky proposition. Over it, bulk of the Indian farmers falling  under the category of small and marginal farmers category are not known to maintain books of accounts, nor do they carry out their transactions through banking channels.

All this obviously creates an insurmountable information-vacuum. Collection of information in such a syndrome becomes costly. And assessing taxable income sans reliable information means relying on the declarations made by the farmers and this would simply become arbitrary. This arbitrariness gives ample room for disputes/appeals and granting discretionary powers to the bureaucracy means affording scope for corruption.   

That aside, farmers in India, though not taxed directly—except of course, Tea, Coffee and Rubber Plantations where certain percentage of income generated from these sources are subjected to income tax—do face many kinds of implicit taxes:  Controls on exports, that too, when international prices are soaring high,  imposition of stock limits by local governments and restrictions on free movement of agricultural produce across the state boundaries  are all known to suppress farm gate prices, land ceiling, and importantly, the endless exploitation of farmers by greedy traders and commission agents at the mandis by offering such prices which do not cover even production costs, are all implicit taxes that the farming community pays today.

Factors such as highly fragmented holdings across the nation, which offer little scope for modernization of agricultural practices, poor irrigational facilities, little or no scope for capital outlay resulting in stagnation of yields, and the poor bargaining power of the farmers (for getting better prices) hardly leave much with the farmers that could be taxed. Against this backdrop, any attempt to tax farm income may not prove economical vis-a-vis meagre revenue for the exchequer.

To be precise, agriculture is a hard-to-tax sector, and therefore any move in this direction calls for careful calibrations.