Taxing Agricultural Income in India: Navigating the Challenges and Potential Benefits
Taxing agricultural earnings is not easy. It is crucial to strike the right balance between the taxation of income from agriculture and potentially demotivating the agricultural sector. The best option is to alter the definition of 'agricultural income' in tax laws and impose an appropriate monetary threshold following thorough consideration and research
Understanding Agricultural Income
To understand what agricultural income actually is, one needs to refer to the Income Tax Act 1961 [source]. Under Section 21A of the Income Tax Act, agricultural income is defined as the rent or revenue from land. Alternatively, it is income derived from buildings on the land. Section 10A of the Income Tax Act also declares that agricultural income is exempt from the computation of annual income.
Why We Don't Tax Agricultural Income
It is because of a promise made by the Congress party to Indian countrymen during the colonial rule that after independence, they will exempt agricultural income from taxation. Despite a large population earning from agricultural activities, this exemption has continued.
Why Agricultural Income Should Be Taxable
Since its inception, rich farmers or non-agriculturalists have been evading taxes under the guise of agricultural income. By taxing agricultural income, substantial revenue can be generated, thereby fostering all-round development in the country.
Committees and Historical Recommendations
Various committees have been appointed to examine the possibility of taxing agricultural income. Recently, Bibek Debroy suggested that the agricultural income of farmers in India should be taxable, but this recommendation was rejected by Finance Minister ArunJaitley. However, this is not new; the idea of collecting tax from agricultural income has been widely suggested and recommended by various committees post-independence. For instance, Dr. B.R Ambedkar, India's famous lawyer and the chairman of the drafting committee of the Constitution, had suggested the inclusion of agricultural income under the ambit of taxation.
The Taxation Enquiry Commission constituted in 1954 opined in favor of the taxing of agricultural income. The K.N Raj committee, established in 1972, examined this issue and prepared a comprehensive report on how agricultural income should be taxed. The committee came up with a new type of tax called Agricultural Holdings Tax (ATH), which would assess the tax based on certain uniform criteria. The tax would take into account the difference in productivity across different lands, and it would need to be progressive.
The Kelkar Task Force estimated that 95% of farmers below the tax threshold, and the Task Force 2014 suggested taxing agricultural income. These recommendations agree that the agricultural sector should be brought under the taxation regime.
Challenges and Considerations
While the idea of taxing agricultural income sounds promising, there are several challenges that need to be addressed.
1. Decline in Agricultural Sector's Contribution to GDP
India has seen a drastic decline in the contribution of the agricultural sector to its GDP since independence. The share of agriculture in the GDP has decreased from 32% to 15% in 2016, despite 49.7% of the population still depending on agriculture.
2. Attraction of Young Talent to Agriculture
Currently, agriculture does not attract young talent. Many do not want to work in the field.
3. Infrastructure and Rural Banking
To bring around 50% of the total population under the taxation regime, a huge machinery is needed to examine and maintain their data. Additionally, there is a lack of good infrastructure and transport, which hampers agricultural productivity. Rural banks face challenges due to a lack of cash flow, making it hard for farmers to access loans.
Way Forward
The government needs to incentivize farmers and youth to enter the agricultural field. Ensuring the availability of funds in banks so that they can be easily borrowed at low-interest rates is crucial. Providing decent compensation to farmers for damage to agricultural produce by drought or flood, and cherishing the noble achievements of Gandhi, as vividly exposed in the Kheda Satyagrah, is essential.
Small farmers should not be included as taxpayers. Only rich farmers will have to pay tax based on the productivity of the land they hold. It is necessary for political representatives to discuss and debate over this issue with various stakeholders to find viable solutions. Lastly, the agricultural sector, on which half of India's population depends, should be treated with great sympathy and effectiveness. An efficient analysis and holistic survey are mandatory before implementing such a proposal, and above all, for transparency, competitiveness, and economic growth, taxing agricultural income is an incredible idea until it potentially harms the livelihoods of marginalized or small farmers.