Insights into Editorial: Equity in taxes
Insights into Editorial: Equity in taxes
Finance minister Arun Jaitley has categorically stated that government has no plan to tax agricultural income. This followed a proposal by Niti Aayog member Bibek Debroy to levy such a tax.
- Few experts are seeing Finance Minister’s statement as unfortunate as it shows that the default mode of India’s policy makers is to ring fence agriculture and hamper its modernisation. It ignores the linkages between the agriculture and non-agriculture sectors which, among other things, allows for tax evasion.
The Income Tax Act through section 10(1) exempts agricultural income from tax and it includes, “(a) Any rent or revenue derived from land which is situated in India and is used for agricultural purposes. (b) Any income derived from such land by agriculture operations including processing of agricultural produce so as to render it fit for the market or sale of such produce. (c) Any income attributable to a farm house subject to satisfaction of certain conditions specified in this regard in section 2(1A)”.
Why tax on agricultural income is a good idea?
- Any serious campaign to widen the tax base and curb black money should address what income tax department reports have shown: agricultural income is used as a conduit to avoid tax. There is nothing to worry as a tax on agricultural income will exclude most of India’s 90 million agricultural households as their average income is way below the threshold income.
- Taxing agricultural income can improve access to finance to a large section of farmers because verified income tax returns can provide a credible signal of the earnings potential of a farmer. Such verifiable information can help to separate conscientious and productive farmers from the unscrupulous or unproductive farmers. Such separation can be very useful in not only enabling access to finance but also entered using the cost of credit borne by farmers.
- Taxing also helps banks to carefully eliminate strategic defaulter intending to exploit the lax enforcement standards prevalent in the country. Well-directed agricultural loans would not only enhance agricultural productivity, but also hasten the movement of unproductive agricultural workers to the manufacturing sector.
How taxing helps both small and big farmers?
Suppose both farmers file income tax returns every year. In this case, the big farmer can present his income tax return to the loan officer in order to demonstrate his earning potential. In the case of small farmers, income tax returns can provide a reasonably credible measure of earnings potential because they would neither have the high income nor the incentives to hide such high levels of income.
- With this, now the loan officer too has a credible basis to distinguish between the borrowers. More importantly, the borrower need not depend on a particular loan officer or a particular bank.
- This also improves the bargaining power of the borrowers by enabling them to tap multiple sources for financing.
Why it is difficult to introduce this new tax?
The public image of farming being a poor man’s venture and the sizeable vote share that farmers enjoy have made the idea of farm taxes a political taboo. The frequent distress faced by poor or marginal farmers, which could be attributed to structural issues other than taxation, hasn’t helped matters either. Besides, it requires a Constitutional amendment as the taxation of the income from agriculture is a subject falling under the states’ domain.
However, in the absence of accompanying reforms, a tax on high-income farmers will result only in driving resources away from agriculture into other sectors. It would make no difference to poorer farmers stuck in agriculture, merely because of the lack of opportunities.
A move to tax agriculture should be packaged with steps to help farmers. For instance, sudden export bans on a commodity when international prices are soaring amounts to imposing a cap on farmer incomes. In the same vein, restrictions on movement within India distort agricultural trade. Agricultural products too need a common market and farmers should be freed of shackles which tie them to designated wholesalers.
One way to proceed could be to act on a proposal of the last tax administration reforms committee, which suggested a high threshold of Rs 50 lakh annually. To facilitate this move state governments will have to be enlisted to follow the relevant constitutional procedure.
It is no secret that India’s tax base, standing at a minuscule 5.9% of the working population, is already among the lowest in the world. This unnecessarily burdens the more formal sectors of the economy that are already overtaxed; at the same time, it handicaps government spending on the social sector. India has a presence of rich farmers as well and there exists as a strong justification for taxing them in order to widen the country’s embarrassingly narrow tax base. The case for treating agriculture on a par with other sectors is thus clear. But policymakers must also show equal care and urgency in addressing the structural issues facing the sector.