A case for agricultural taxation in India
January 08, 2017

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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

  • Currently just 1% of Indian population pays income tax ( about 1.27 crore individuals) out of which around 89% pays very low taxes (2014-15 data)
  • Only 4% of registered voters pay taxes ( the desirable ratio is 23 -25%).

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?

  • Agriculture and land revenue are under state list of Seventh Schedule of our Constitution. Therefore taxation of agriculture can’t be done by central government. State governments need to take up these. It may happen that there are not enough agricultural people in a state who may be taxed. So may not generate much revenue for the state government.
  • Populist and political issues also remain.

What can be done then?

  • The best possible outcome is always the case that move more people from agriculture to industrial sector (industry and services).
  • Remove exemption of agricultural income from Income Tax Act,1961. Currently the Act allows exemption on income tax payment upto Rs. 2,50,000 of annual income. Farmers earning more than this can thus be taxed. Of course give such farmers benfit under 80c and other sections of IT Act for tax saving.
  • Don’t give exemption on agricultural income to people who have income from other sources also. Many people in order to avoid income taxes show crores of income as agricultural income. The provision is also used to make black money as white many a time.

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).