Non-taxing of agricultural income is said to be based on social equity principle for betterment of farmers. However, the system has more of a political and vested interest base rather than being socially equitable.
Some data on income tax capacity of India
Consider this –
Total Indian workforce = 48 crore approx
Out of it workforce engaged in agriculture ( approx 50% of workforce ) = 24 crore approx
Obviously , All of this 24 crore can’t be taxed given many of them has low income.
So who can be taxed in agriculture? Consider the following mathematics .
25% of all people in agriculture work as agricultural laborers and landless (holding 0.0 - 0.1 hectares), it means their number as = 25% of 24 crore = 6 crore
Remaining are landowner farmers = 24 – 6 crores = 18 crores
Marginal (holding 0.1 – 2.5 hectares) and small ( holding 2.5 – 5 hectares) comprise another about 65% = 65% of 24 crore = 15.6 crore
Semi- medium ( holding 5-10 hectares) comprise another about 6% = 6% of 24 crore = 1.44 crore
Now about 4% of agricultural population has medium ( holding 10 -25 hectares) and large (> 25 hectares holding) which comprise = 4% of 24 crore = 0.96 crore or 96 lakh people.
Now these 96 lakh rich farmers may have taxable capacity. Even if we that only 20% of this 96 lakh can pay taxes then also it amounts to 19.2 lakhs people .
It would mean total personal income tax payer base in India would increase from about 1.3 crore now to about 1.5 crore, which would be a significant increase.
Issues involved in taxing agriculture?
What can be done then?
Finally, even if not much taxes can be generated from taxing agriculture, the system of taxation in agriculture will bring many citizens in direct contact with the State, will help curb black money generation and tax evasion, will promote saving habit in farmers, and mobilize surplus income generated in agriculture.( for eg: if farmers opt for tax saving under IT Act, they will have savings and these savings can now form part of national resources).