Agriculture income and critical discussion on posing tax on agriculture income

Taxation is the process of paying certain sums of money for the government in order to maintain the proper living conditions in the country. Taxes are imposed by government to provide people with up-to-date well-developed communication and transport systems, sewers, electricity, gas, water, security, the services of the police, firemen, health care and nearly everything a modern person requires for the normal life. Agriculture in India Agriculture in India has a significant history. Today, India ranks second worldwide in farm output. Agriculture and allied sectors like forestry and fisheries accounted for 16.6% of the GDP in 2009, about 50% of the total workforce. The economic contribution of agriculture to India's GDP is steadily declining with the country's broad-based economic growth. Still, agriculture is demographically the broadest economic sector and plays a significant role in the overall socio-economic fabric of India. Agricultural Income: Agriculture income is exempt under the Indian Income Tax Act. This means that income earned from agricultural operations is not taxed. The reason for exemption of agriculture income from Central Taxation is that the Constitution gives exclusive power to make laws with respect to taxes on agricultural income to the State Legislature. However while computing tax on non-agricultural income agricultural income is also taken into consideration. What does the term Agricultural Income mean? As per Income Tax Act income earned from any of the under given three sources meant Agricultural Income; (i) Any rent received from land which is used for agricultural purpose: Assessees do not have to pay tax on rent or revenue from agricultural land. Such land should, of course, be assessed to land revenue in the country or be subject to a local rate. Further, there must be a direct link between the agricultural land and the receipt of income by way of rent or other revenue (for instance, a landlord could receive revenue from a tenant).

(ii) Any income derived from such land by agricultural operations including processing of agricultural produce, raised or received as rent in kind so as to render it fit for the market, or sale of such produce. (iii) Income attributable to a farm house subject to the condition that building is situated on or in the immediate vicinity of the land and is used as a dwelling house, store house etc. Income from such farm houses is considered agricultural income. The definition of `farm houses covers buildings owned and occupied by both cultivators of agricultural land and assesses who receive rent or revenue from agricultural land. The sole purpose of such farmhouses should be for use as dwellings for the cultivators or use as store houses. Normally, the annual value of a building is taxable as `income from house property. However, in the case of a farm house, the annual value would be deemed agricultural income and would, thus, be exempt from tax. (iv) Income earned from carrying nursery operations is also considered as agricultural income and hence exempt from income tax. In order to consider an income as agricultural income certain points have to be kept in mind: (i) There must me a land. (ii) The land is being used for agricultural operations:- Agricultural operation means that efforts have been induced for the crop to sprout out of the land. The ambit of agricultural income also covers income from agricultural operations, which includes processing of agricultural produce to make it fit for sale. Like the people who receive passive agricultural income in the form of rent or revenue, the people who actually carry out agricultural operations are also eligible for tax-free agricultural income. (iii) Land cultivation is must:- Some measure of cultivation is necessary for land to have been used for agricultural purposes. The ambit of agriculture covers all land produce like grain, fruits, tea, coffee, spices, commercial crops, plantations, groves, and grasslands. However, the breeding of livestock, aqua culture, dairy farming, and poultry farming on agricultural land cannot be construed as agricultural operations. (iv) If any rent is being received from the land then in order to assess that rental income as agricultural income there must be agricultural activities on the land.

(v) In order to assess income of farm house as agricultural income the farm house building must be situated on the land itself only and is used as a store house/dwelling house. (vi) Ownership is not essential. In the case of rent or revenue, it is essential that the assesses have an interest in the land (as an owner or mortgagee) to be eligible for tax-free income. However, in the case of agricultural operations it isnt necessary that the person conducting the operations be the owner of the land. He could be just a tenant or a sub-tenant. In other words, all tillers of land are agriculturists and enjoy exemption from tax. In some cases, further processes may be necessary to make a marketable commodity out of agricultural produce. The sales proceeds in such cases are considered agricultural income even though the producers final objective is to sell his products. Certain income which is treated as Agriculture Income; (a) Income from sale of replanted trees. (b) Rent received for agricultural land. (c) Income from growing flowers and creepers. (d) Share of profit of a partner from a firm engaged in agricultural operations. (e) Interest on capital received by a partner from a firm engaged in agricultural operations. (f) Income derived from sale of seeds. Certain income which is not treated as Agricultural Income; (a) Income from poultry farming. (b) Income from bee hiving. (c) Income from sale of spontaneously grown trees. (d) Income from dairy farming. (e) Purchase of standing crop. (f) Dividend paid by a company out of its agriculture income. (g) Income of salt produced by flooding the land with sea water.

(h) Royalty income from mines. (i) Income from butter and cheese making. (j) Receipts from TV serial shooting in farm house is not agriculture income. Tax on Sale of agricultural land: - Before 1970, profit on the sale or transfer of all agricultural land was considered rent or revenue derived from the land. Such profit was, therefore, taxexempt as agricultural income. Critical discussion on taxing on Agriculture income Imposed for the first time in Bihar in 1938. The agricultural income tax in its infamy, was, for obvious reasons, a great favorite with economists and also received support from official bodies reporting on taxation. Two more States, Rajasthan and Madras joined in 1954. This tax was repealed in Hyderabad and U P in 1957 and in Rajasthan in 1960. But now it is removed. DR. Ambedkars views on Agriculture Income Tax From last two decades or so there is debate on taxing on agricultural income, most of the leading economists are in favor of taxing agriculture income. However, land lords, have strong lobby in Indian politics and consistently they are opposing taxes on agriculture income. Dr. Ambedkar have argued this issue before eight decades or so and favored the taxing agriculture with sound reasoning his views are very much relevant even in present context. Role of Taxation in developing country like India According to Dr. Ambedkar, the socio-economic development of an economy depends primarily upon the availability of adequate finances and their proper utilization. In India, taxation was assigned the central task of collecting sufficient revenue to finance economic development program in spite of low ability to pay taxes due to extremely low levels of income and consumption. The essence of revenue function of taxation policy in the initial stage of development was to cut down the existing level of consumption, particularly of welloff sections, and mop up the savings for public investment. However, as income rose consumption levels were to be prevented from rising and additional revenue generated. The strategy was to channel an increasing proportion of incremental income into building

development infrastructure. Taxation was the main fiscal weapon available to the government for this purpose and it has to be used to the hilt. Taxing at progressive rates partly as revenue and partly as equity measure, the government attempted to make both direct and indirect tax rates progressive. However, it is to be noted that the merit of progressiveness has been lost while implementing it in letter and spirit. Arguments for taxation: The Taxation Enquiry Commission (1953-54) recommended the revision or tax taking into consideration the changes in prices of agricultural products. But government of India did not take it seriously. In India, political considerations are more important in the case of land taxation than in any other from of taxation. Therefore it is difficult to get political support for any move that leads to an increase in the tax burden on the agricultural sector. Farming lobbies act as interest groups and put up strong resistance whenever the government attempts to mobilize more revenue from the agricultural sector. Several proposals were made in the fifties and the sixties for reform of land revenue system, but none of them were accepted and implemented. A very valuable and by far the most comprehensive study of agricultural taxation is the one undertaken by the committee on taxation of agricultural wealth and income (1972) familiarly known as K. N. Raj Committee. Unfortunately, the recommendations of this committee also went into cold storage. To remove the deficiencies of the existing system of taxation of agricultural income, a drastic change in the system is needed. What is needed is a unified system of taxation of agricultural and non-agricultural incomes and for this purpose taxation of agricultural income must be taken out of the state list through a constitutional amendment and an integrated system of taxation of agricultural and non-agricultural incomes must be introduced. The Central Government and the Planning Commission have emphasized on the necessity of raising additional resources from the agricultural sector. Yet, the fact of the situation is that when it comes to practical implementation the central government cannot do anything in the matter, as agriculture is a state subject. The long-term fiscal policy (December 1985), recognized that taxing agricultural income presents many conceptual and administrative problems. Land revenue and taxation of agricultural income are states subjects under the constitution. The centre has no intention of seeking any change in the position. On such inability of central government the Sarkaria commission observed that such an approach

however does not solve the problem and the reforms in sphere of agricultural taxation are long overdue. There is in general unanimity that at least the large landlords should be taxed. A suggestion often made is that in order to overcome the resistance by interested groups and in the interest of uniformity in taxation the union may levy a tax on agricultural income and its net proceeds be assigned to states. It has also suggested that in the interest of the raising revenue and uniform tax on agricultural sector the Union Government might levy this tax as per arrangements under Article 268 of the Indian Constitution. Political domination of Land Lords: Taxes on agriculture have remained generally untouched since several years in India. On the contrary, land revenue on agriculture has been either dropped or reduced considerably. On many occasions the State Governments competed with each other to provide relief to the agriculturists by giving them tax concessions or by abolishing some taxes altogether rather than taxing them. As many economists point it out, land revenue from agriculture income is inelastic. It does not increase with the increase in prices of agricultural products. This trend is in the favor of pretty agriculturist. The affluent peasantry, who constituted perhaps the most powerful group within the Indian coalition, successfully imposed three conditions on economic policies. 1) Land reforms should not be pushed beyond a certain point, 2) There should be no taxation of agricultural income and wealth, 3) And the state should maintain high prices for outputs and low prices for major inputs and thereby maintain a budgetary policy with heavy subsidies. With the provision of irrigation and modern farm techniques production has became more stable. The farmer also gets an assured price for his product. Agricultural income is now quite high and stable. It is fit enough to be taxed like any other income. It is necessary that agricultural income is now brought under taxation. The surpluses generated in the farm sector are large and are increasing year after year. The upper income groups are taxed in the urban areas, but their counter-parts in the agriculture sector are not being taxed. In principle, the agriculture income should be taxed the same way as urban income. The use of new technology and diversification in agriculture to horticulture and

shrimp farming has raised income from agriculture. The small or marginal farmer will not be against the large farmer being taxed. In any case, there is a very good economic rationale for taxing agriculture. From, the point of view of horizontal equity, as far as possible, all incomes should be treated in the same manner for tax purposes. Hence, income from agriculture should be subjected to the same tax treatment as non-agricultural income with the necessary adjustments to take care of the special characteristics of agriculture. The economic rationale is impregnable. That does not mean that agricultural income tax will be introduced in the next budget or so. That is because there has not been any change in the political perception. If at all, farmers have been pampered more than ever, farm inputs like fertilizers, electricity, diesel, etc are heavily subsidized. That is the price the politicians have to pay for winning their supports. Subhash Lakhotia : CNBC Awaaz, Tax & Investment Consultant For the last so many decades the agricultural income derived in India by tax payers of India is completely exempt from income-tax. A question now crops up in our minds are whether such agricultural income should be taxed right now. Those who are deriving the agricultural income will surely not like this income to be a part of the taxable income. But the fact remains that in a country like India where huge expenditure is still required for the development of the infrastructure and also because of the fact that the GDP ratio is not in tune with the desired benchmark and keeping all these factors in view, he strongly feel that it is time now to tax the agricultural income of the agriculturists in India. Substantial revenue will be collected by the Tax Department in case agricultural income is subjected to income-tax. However, the problem in India is that because of the politics of vote bank no government can dare to touch this subject matter namely of taxing the agricultural income of the agriculturists in India. However, the fact remains that whenever we want some change in the tax laws of the country we must have a holistic approach to the entire subject matter and that our emphasis should be debated and discussed upon without taking into consideration the political game or advantage consequent to an amendment in the tax provision. It is in this light that he strongly feel that we should have a very purposeful and objective debate on all India basis to decide whether to tax or not to tax the agricultural income derived by agriculturists.

Persons who are engaged in cultivation and produce agricultural income always enjoy the sympathy of the statute makers of the country. The rising trend in suicides being committed by agriculturists also goes to support the sympathy in favour of the agriculturists of the country. With the rise in the suicide rate by the agriculturists more and more sympathy goes in favour of agriculturists and at that point of time to think about taxing agricultural income might bring home a fear of more and more suicides being further committed by the agriculturists. With regard to suicides by agriculturists the Government should analyse the reason behind the committing of the suicide and should bring home positive ideas to control such suicides by the farmers of the country. But on the other hand taxing agricultural income should not be ignored keeping in view the rising money requirement of the country to meet fiscal deficit and to develop the infrastructure of the country. In case income tax is levied on agricultural income without considering the real impact on the agriculturists, all those persons who are attached with the political parties would immediately jump upon to say that as a result of taxing the agricultural income, the poor farmer will virtually die because of the increased burden of income-tax on him in case agricultural income-tax is levied in the country. However, it may be noted that even if agricultural income in India is subjected to income-tax, still majority of the agriculturists I mean the marginal farmers of India will not come within the ambit of income-tax payment because in any case the basic income-tax exemption even for agriculturists would continue to be Rs. 2,00,000 per annum namely the same basic exemption which is enjoyed by any other tax payer of India. Thus, in case the Government subjects agricultural income to tax, then one need not worry about any possible hue and cry amongst the farmers of India because if the farmer is deriving income from agriculture up to Rs. 2,00,000, he in any case has not to pay any income-tax at all. If we analyse the land holding by individual persons in India, we would find that in majority of the cases the land holding is in the name of different family members of the farmer. As a result of land holding being available in different individual names in the family, the advantage is that each family member of the farmer will get income-tax exemption up to Rs. 2,00,000 per annum even if the agricultural income is subjected to income-tax. The practical impact of this can be seen from an example of a family of five persons of a farmer and in case agricultural income is subjected to tax but still all the five family members will have a

combined income of Rs. 10 lakhs in a family which would be exempt from income-tax. This is the special advantage available to a farmer and this advantage is generally not available to all those tax payers in India who are not farmers. Driving in Mercedes cars are a common feature in Punjab particularly where large number of agriculturists buy luxury cars, luxury homes and luxury holidays. Tax Paying public of India is frustrated when they find that a tax payer doing hard work in his business after making payment of income-tax is not able to buy a Mercedes car but an agriculturist who is required to work much less in comparison with a person in a city goes scot-free for making investments in the manner he likes just because there is no income-tax on the agricultural income earned by him. Hence, if the Government takes a decision to levy tax on agricultural income, then surely the rich and famous agriculturists of India would be required to make payment of income-tax which will increase government revenue on the one hand and which will increase GDP ratio in the country and would finally help in the holistic development of the country. We can say that if agricultural income-tax is levied in India, then it is possible that the farmers would be tempted to go in for research based new innovations in agriculture and would be seen using new technology, new machinery and new vistas to achieve higher agricultural output which will be helpful to the country. Hence, if agricultural income-tax is levied in India then fruit juice, ayurvedic herbs production and such other connected activities in agriculture will flourish and there would be desire amongst the agriculturists also to achieve more output from the land which they own. It is expected that dynamism amongst the agriculturists will be on fast track in case agricultural income-tax is levied in India. If the Government finds that it is not ready right now to tax the entire agricultural income, in that situation they may initially exempt agricultural income by farmers having land holding up to five acres and likewise to start with, the Government may also exempt taxing

agricultural income in case it is derived by cultivating rice, wheat and vegetables. The theme is that at least let there be a start for taxing the agricultural income of particularly the rich. The irony is that about one third of the parliament members are landlords holding hundreds of acres of agricultural land. Keeping the sector untaxed only indicates that 19% of the Indian GDP would still be untaxed and farmers earning billions of green income would contribute zero to the countrys tax revenues.

Conclusion: Taxation on agriculture income is good for economic health of the nation. But the powerful landlords lobby is constantly creating obstacles in the way of implementation. Therefore, this sector is remained untouched from any changes in tax pattern. Hence, change in political attitude and determination is necessary for taxation on agriculture income in India. Finally we can say that taxing agriculture income helps in economic development.