Should Agricultural Income Be Taxed?

The taxability of agricultural income has been a topic of discussion in the recent past. Niti Aayog the government’s think tank, recommended taxing income beyond a particular threshold and the Chief Economic advisor felt that given the constitutional limitations, the states should tax agricultural income. As expected the opposition criticised the move threatening an agitation. Finally, the finance minister stepped in to clarify that the government had no intention of taxing agricultural income.

The mention of the term “agricultural income” always results in a wry smile on the face of every tax professional and tax official. This is because on most occasions the term is used as an attempt to explain undisclosed income.

The Seventh Schedule of the Constitution clearly delineates the subjects/areas on which the Centre and the States can legislate. Entries 82, 86 and 87 of the Union list grant the Centre the power to tax income, capital value of assets and levy estate duty on property other than agricultural land. Entries 46, 47 and 48 of the state list grant the power of such taxation to the states. There is no entry in regard to agricultural income / land in the Concurrent List. Article 366 of the Constitution defines agricultural income to mean agricultural income as defined for the purposes of enactments relating to Income tax. It must be mentioned that as far as the Income Tax Act, 1961 is concerned, it grants a specific exemption to agricultural income in terms of section 10(1), and agricultural income is computed only to determine the rate of taxation of other income.

What then is the current scenario in regard to reporting of agricultural income? Reports state that for assessment year 2014-15, four lakh tax payers claimed exemption in respect of agricultural income of Rs.9,338 crore. This includes some corporates in the private and public sector. Considering that agricultural income constitutes 15% of India’s GDP, this is indeed an insignificant figure. This means that a large part of agricultural income remains unreported to the tax authorities.

Agricultural income and agricultural land have always had a special status, right from the times of colonial rule. This is probably because such land was the subject matter of certain levies. Subsequently, large holdings of agricultural land were prohibited and were subject to a ceiling. After the independence, the right to tax agricultural income was granted to the States.

The States, possibly on account of the political influence that farmers wield, have refrained from taxing such income or over the years withdrawn the levy. Maharashtra introduced an Act to tax agricultural income in 1962 but repealed it in 1989, as did the largest Indian State Uttar Pradesh which enacted such a law in 1948 but repealed it in 1957. Assam has such legislation but it taxes only tea cultivation. Kerala is possibly the only state that levies such a tax aggressively.

It is possibly the time to revisit this issue. Readers may feel that while reports of farmers committing suicide, and the waiver of loans are doing the rounds, it is not appropriate to debate this aspect. It must be pointed out that it is nobody’s case that a farmer who has no income is to be taxed. But it is equally true that there are land barons who have circumvented land ceiling laws, have huge income which is going untaxed. If an argument that agriculture is subject to vagaries of nature is raised, it must be pointed out that tax legislation provides for carry forward of losses and in any case these are aspects which can be taken care of.

If at all the taxation of agricultural income becomes a reality, who should have the power to tax it – the Centre or the States? To my mind, agriculture like any other activity is an income earning activity, and the powers of taxation should rest with the Centre and not the States. Another reason for this is that keeping such powers with the States is likely to create inequality. Even today, Kerala taxes plantation income at 50% while there is no such taxation in the neighbouring state Tamil Nadu, putting the Kerala farmers to a disadvantage.

Taxing farmers having income over a high threshold may possibly be a way to start. According to the agricultural census of 2011, farmers holding more than 25 acres were few in number. They were 35% in Punjab, 22% in Rajasthan, 12% in Gujarat and 10% in Madhya Pradesh. I am deeply conscious that there are many hurdles including a constitutional amendment that will have to be overcome and many creases that will have to be ironed out, but it is time that the government takes a relook at this issue. When the GST dust settles down it may be a good time to start!