Should Agriculture be taxed

Note4Students

As the focus of the Government is on black money, looking at agriculture for enhanced tax collection appears a logical corollary. This issue is definitely politically sensitive with several vested interests involved. The Government has been bold enough to operate the National Agricultural Market which breaks the traditional stronghold. The next step would be to start reforms in the direction of taxes so as to bring about greater accountability in the system while plugging the lacuna.

Introduction

  1. The recent discussion on taxing farm income is nothing new.
  2. This kind of thinking was doing the rounds even in British India, when as early as 1925, a committee was set up to assess the feasibility of taxing agriculture income.
  3. The most famous attempt in post-Independence India was the K.N. Raj committee report of 1972, which also examined feasibility and implementation issues.
  4. The Kelkar task force report of 2002 estimated that 95% of the farmers were below the tax threshold.
  5. The underlying argument in the current discussion is to bring more people under the tax net to expand the tax base and also curb tax evasion because income from other sources is usually shown as agricultural income and thus evasion is easy.

Fact and figure

 

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Fig: growth of agriculture

  1. The major problem is identifying the individuals given that many of them own small pieces of land or are landless labourers
  2. 42 million-odd people in the organised sector around 17 million are salaried and pay taxes.
  3. In the unorganised sector which has 56 million workers, another 18 million pay taxes. Hence, the strike rate for a population of 100 million workers is just 35 per cent. In the case of agriculture with 120 million potential assessees, it will be hard to identify them.
  4. During the period 1991 to 2016, the share of agriculture decreased from 32% to 15%.
  5. Compared with this, the workforce dependence on agriculture is still very high, at 49.7%
  6. During the period of economic reforms, the gross capital formation of agriculture, which is the capacity to produce and an increase in productivity, has gone down tremendously

Key issues affecting agricultural productivity include

  1. The decreasing sizes of agricultural land holdings.
  2. Continued dependence on the monsoon.
  3. Inadequate access to irrigation.
  4. Imbalanced use of soil nutrients resulting in loss of fertility of soil.
  5. Uneven access to modern technology indifferent parts of the country.
  6. Lack of access to formal agricultural credit, limited procurement of food grains by government agencies.
  7. Failure to provide remunerative prices to farmers.

Analysis

It should be taxed

  1. 80 years ago Dr. B.R. Ambedkar said he favoured taxing agricultural income.He was of the view that tax should be levied on tax-paying capacity or income of the taxpayer, and that the rich must be taxed more and the poor less. Ambedkar criticised the land revenue system of the British but held the view that income from agriculture must attract tax.
  2. Verified income tax returns provide credibility to the farmer which can be used to obtain adequate loans from formal credit channels.
  3. Banks get easier access to reliable, valid and quantifiable data upon which the credit can be advanced without fear of default on loan.
  4. Adequate formal documentation would help the Government to identify the difference between small and big farmers by which the targeted subsidy schemes in future can be rolled out to benefit the needy.
  5. We can develop our GDP only when our agriculture income is taxed. We do not even have a sense of the extent of agricultural income right now
  6. No taxes on Agriculture encourages laundering of non-agricultural income as agricultural income. e.g In 2014-15, a company made profits of Rs 215 crores, but claiming the agricultural income exemption, it paid no tax.
  7. Have a slab of taxes like we have in other sectors and let each pay according to his income from agriculture.
  8. The farmer with a small landholding of less than 2-3 hectares should be exempted from income tax.
  9. If the small farmer is a reality, so also are the big agricultural farmers with their luxury cars and rich industrialists who own farmlands.
  10. Here, if the government takes a decision to levy tax on their income earned from agriculture, the government revenue will not only rise but there will be an increase in the GDP ratio of agriculture.

Taxing agricultural income has not found favour mainly because of two factors.

  1. A majority of farmers in India — nearly 60% — are small farmers, with small holdings and a small marketable surplus. Their incomes are erratic.
  2. There is no climate insurance for them when the rains fail or in the event of floods. Droughts leave them reeling just as the fury of floods.
  3. Very often, when we talk of farmers, we assume they are all men — 40% of these farmers are women who do not have patta (title deed to the land they till) and do not have Kisan Credit Cards either.
  4. Given the technological and environmental constraints, the performance of the agriculture sector has not been encouraging, and consequently, the welfare of the population living in the countryside has not visibly improved.
  5. The average per month income of a farm household in India in 2012-13 as per the National Sample Survey Office was just ₹6,491.
  6. The income-expenditure gap for a majority of farmers is in the negative.
  7. More than one-third of the farmers have expressed their choice to leave the non-remunerative occupation.
  8. The agrarian distress has been deepening, and there has been a rise in farmer suicides. The agrarian sector is in deep crisis. Instead of finding a viable policy to solve the crisis, floating the idea of taxing farming income is a great disservice to the sector.

Concerns

  1. The other issue is what can be taxed? Should it be value of output or the net income earned by farmers?
  2. While the value of output sold can be gauged and tracked to the extent that it enters the market, this is not net income as there are expenses incurred in growing crops which include seeds, fertilisers, water, and so on. Also for those owning equipment a depreciation value has to be imputed.
  3. This means farmers have to be treated on a par with companies or self-employed professionals and not income tax assessees. How can one draw up such a profit and loss account?
  4. There is a lot of produce that does not enter the market and the marketable surplus can range from anywhere between 65 to 100 per cent depending on whether it is a food crop or a commercial product such as cotton and jute.
  5. Hence, a large part of the value will be hard to fathom on this score. Also there is a lot of under-reporting given the state of logistics in the country.

Way Forward

  1. A bold and dynamic approach is needed in India whereby all the political parties and all the Chief Ministers of India organize a conclave to debate and discuss the issues concerning taxation of agricultural income in India.
  2. The discussion should be held primarily with reference to the national outlook and not personal gain or otherwise to a political party.
  3. If this type of debate or discussion takes place in the country, then surely the policy makers may  be able to come to the conclusion that after decades of exemption of agricultural income now is the time that agricultural income be put to tax like any other normal income of the tax payer.
  4. A way out is to tax the product which is presently also being done in some States through a mandi tax or something else.
  5. This tax will be finally passed on to the consumer who will then have to pay a higher price for the product.
  6. Such a move will ensure that the tax does not come in the way of the farmer’s income. Strictly speaking this would be an indirect tax on commodities, like an excise or sales tax, which will get subsumed under GST. The income of the farmer will still be outside the ambit of income tax.
  7. The procurement policy plus pricing policy and the public distribution system have to be factored in before there is any talk of bringing the sector in the income tax net.
  8. Need to devise a method that takes into account agricultural income beyond a certain threshold
  9. Don’t give subsidies after a certain threshold.
  10. We can devise methods to tax agricultural income.
  11. have differential subsidies. Remove subsidies in the case of irrigated farming as opposed to rain-fed farming. A majority of the farmers are dependent on monsoons.

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