Agricultural income is outlined under Article 366 of the Indian Constitution, which states that Agricultural income as defined for the purposes of the enactments relating to Indian income-tax. Section 2(1A) The Income Tax Act gives a definition of agricultural income as including rent/revenue from agricultural land in India, income derived from processes to prepare produce for the market or direct sale by cultivators, and from buildings near agricultural land that are essential for farming activities. Section 10 (1) exempts income derived from agriculture from being taxed. Taxation on agricultural income falls under the ambit of State legislation under the seventh schedule of the Constitution. The tax exemption granted to agricultural income has been debated for over a century, starting from the Taxation Enquiry Committee in 1924-25, which records that “there is no historical or theoretical justification for the continued exemption from the income tax of income derived from agriculture. There are, however, administrative and political objections to the removal of the exemption at present.” Also, the Wanchoo Committee on Direct Taxes in 1971 also recommended that the total exemption on agricultural income should be removed and brought under the ambit of income tax, as the provision was prone to being misused. Similarly, the Law Commission Report on “Proposal for inclusion of agricultural income in the total income to determine the rate of tax under the Income Tax Act, 1961” which proposed for including the agricultural income under the total income because of the evasion of income tax by assessees who show their non-agricultural income as agricultural income, allowing them to not pay the legitimate taxes on them.
Thematic Overview: Comprehensive Analysis
The Vijay Kelkar Committee in 2002 was constituted with the objective of addressing the worsening fiscal situation of India. The recommendation of the Task Force on Direct Taxes on the treatment of agricultural income was that the Central Government should take on the power to tax agricultural income from the States. The reason is that there was negligible taxation on this sector by the states, resulting in serious distortions in both horizontal and vertical equity at the same time, it encourages laundering of non-agricultural income as agricultural income, providing a haven for tax evasion. The Committee provided empirical data to prove these arguments by showcasing a sample of tax returns filed in Mumbai, revealing the revenue loss from laundering of non-agricultural income as agricultural income to be around Rs. 1000 crores. It also recommended a separate tax return form, which should be used for taxpayers deriving income from agriculture.
The Third Tax Administration Reform Commission Report of 2014 makes an observation holding that non-agricultural income is turned into agricultural income as a means to avoid paying taxes, and is used as a means for laundering funds. This, in turn, causes a huge blow to the Indian economy, resulting in a loss of crores of revenue annually. The report also suggests a solution for the same, which is through taxing the large farmers. Tax exemption of agricultural income was to protect small-scale farmers and foster their growth in a country that was primarily constituted as an agrarian economy. Therefore, the objective of the exemption was always to promote agriculture and protect vulnerable farmers, and not to allow the ultra-rich creamy layer to employ this provision in order to avoid paying taxes. The suggestion is that the tax-free exemption on agricultural income should be limited to Rs. 5 lakhs, whereas farmers generating annual agricultural income as high as Rs. 50 lakhs should be taxed accordingly. This would ensure that the objective of the tax exemption is fulfilled, as small farmers would be kept out of the purview of taxation, and at the same time, ensure that there is no misuse of the provision. The TARC holds that the states should pass a resolution under Article 252 of the Constitution allowing the Centre to impose taxes on agricultural income, and the total taxes collected could be assigned to the States. The Commission holds it as a fundamental structural reform that requires a uniform political action bringing together the legislature and executive. However, successive governments have yet to take any such action to tax agricultural income because of the political stronghold that the agricultural lobby has over governments.
Based on the third TARC, the Comptroller and Auditor General of India discussed the issue of tax exemption of agricultural income in its report of 2019. The objective of the Audit was to ascertain that the Assessing Officers were following the rules laid down concerning the genuineness and correctness of the exemptions claimed in respect of agricultural income. The Audit for research purposes took a sample of assesses who had claimed exemption on agricultural income during the financial year 2014-2015 to 2016-2017, with a total of 7,082 cases out of which 6,778 cases were produced. The Audit finding recorded those 1,527 cases out of 6,778, that is 22.5%, had their claim of exemption based on agricultural income allowed without any verification of supporting documents such as the land records, income, and expenditure, including bills, invoices, etc., or no other documentary proof to support the claim. It was also noted that there were instances where there was no verification of the expenditure incurred to earn the agricultural income, which might result in bringing black money into the financial system. In its conclusion, the report stated that the Income Tax Department should re-examine all these cases where income has been allowed as agricultural income despite a lack of relevant documents to establish the same. It is recommended that ITD carry out a 100% check on cases where agricultural income above a certain threshold is claimed to ensure that the exemption is allowed only to eligible assesses with appropriate documentation and verification.
The Public Accounts Committee in 2022 presented a report, “Assessments relating to Agricultural Income,” where it examined the CAG 2019 report. The Committee held that there is a need to strictly comply with the procedures for verification of documents to ensure that the exemption is granted only to agricultural income falling under Section 2(1A) of the Income Tax Act. The Committee also noted the response of the Ministry in regards to the recommendation of 100% check of cases where the agricultural income is above Rs. 10 lakh, which stated that in the Annual Year 2020-2021 21,55,368 taxpayers reported agricultural income, out of which 59,707 reported agricultural income exceeding Rs. 10 lakhs. This means that it would be impossible to analyse every case, therefore, a select 3379 cases were picked as per the available resources. The Committee made the recommendation that higher scrutiny should be on the taxpayers reporting high agricultural income. Therefore, there should be categorization of cases of agricultural income into three slabs- above Rs. 10 lakhs, Rs. 50 lakhs, and Rs. 1 crore in Computer Aided Scrutiny Selection (CASS) to target high evasion risk cases.
Economic Impact
Agriculture contributes around 14% of the country’s GDP. As per the Government’s White Paper on Black Money states that the action of granting exemption to agricultural income for income tax purposes without verification of claim allows an avenue for bringing black money into the financial system as agricultural income. State governments should look into levying agricultural income tax with a facility for computerized processing and selective verification. This will ensure that there is an increase in the revenues of state governments, and on the other hand, prevent laundering of black money under the garb of agricultural income.
Bibek Debroy similarly states that there have been various reports which suggest that the method of curbing money laundering is through bringing the avenue of agricultural income to be taxed. But despite such reports, no action has been taken by the Central government. He suggests the reason is that the increase in the political clout of large farmers who have increased their income substantially post-green revolution ensures that the agricultural income remains exempt from taxation.
The impact on the economy of India would be severe as the tax exemption being provided is not only used by poor marginalised farmers but also giant corporations such as seed giant Kaveri Seeds who claimed Rs 186.63 crore (Rs 1.87 billion) as exemption and made a profit of Rs 215.36 crore (Rs 2.15 billion) before tax and the multinational Monsanto India, which claimed Rs 94.40 crore (Rs 944 million) as exemption from agricultural income and earned Rs 138.74 crore (Rs 1.39 billion) profit before tax in the assessment year 2014-2015. Agriculture hides a number of companies and rich farmers, whom no finance minister will tax. Therefore, taxing large agriculturists would help widen India’s taxpayer base as per the 2016 Economic Survey and would increase the current 5.5%, or 39 million individuals who pay tax.
The argument that the tax exemption on agricultural income is to protect small-scale farmers would be incorrect, as small farmers who own less than two hectares of land account for 86.2% of all farmers in India, but they only own 47.3% of the crop area as per the 10th agricultural census of 2015-2016. On the other hand, semi-medium and medium land holding farmers owning the land between 2-10 hectares only accounting for 13.2%, own 43.6% of crop area. This proves that the benefit of the exemption is mostly being enjoyed by large individual farmers and corporations. This is a clear case of abuse of the provision designed to facilitate real agricultural operations in rural areas.
Suggestions
The reasons for agricultural income tax exemption are not sufficient to allow a blanket exemption as the amount of money laundering and tax evasions has significantly increased over the years, with a recent trend being observed that the rich privileged class misuses the exemption for their own benefit, causing a drain in revenue generation. In actuality, every income, including agricultural income, should be subjected to taxation. Although the majority of small-scale and marginal farmers can be granted exceptions, the fact that the rest of the farmers’ income would be charged under income tax would have a salutary effect on non-farming entities reporting their income under the agricultural category and enjoying the benefits of being tax-free. Take an example of Suhana Khan, an actress by profession who comes from an affluent family, yet declared herself as an agriculturist when buying property in Thal village, Alibaug near Mumbai. Such misuse can only be curbed by taxing agricultural income. The first step would include amending the definition of “income” under the Income Tax Act itself and introducing a threshold so that not all agricultural income would remain exempt. This threshold should be standardized in a manner that focuses on high-income farmers, as suggested by various government reports. The tax slab could be, for instance, Rs. 10 lakhs as provided under the CAG Report of 2019. Additionally, officers working as public servants who disclose their agricultural income should be taxed at regular income tax rates, and no exemption shall be provided.
Exemptions could be provided for certain specific categories of farmers, such as those who have operational landholdings solely in dryland areas. An initial approach could be that there is a fixed tax on the basis of the size of the landholding and the crop that is grown on it. In various countries, indicators such as gross income per unit and marketable surplus are used to calculate the income, and then taxes are applied. If a farmer disagrees with the estimated income, they shall have the onus to provide relevant, detailed accounts of their actual earnings. At a minimum, farmers above a certain income threshold should be required to file returns, integrating them into the formal tax system.
Other recommendations include that the issuance of certificates declaring individuals or corporations as “farmers” should be based on verification of the relevant documents to ensure that a non-agriculturist does not take advantage of the exemption and declare themselves as a farmer. Similarly, there should be a constant policy reviewing the impact of taxation policies on farmers, and the Department of Income Tax should be more vigilant when dealing with exemptions about agricultural income, and increased focus on individuals disclosing higher income generated from agriculture.
Conclusion
The analysis of all the relevant reports throughout the years proves that the conflict over the taxation of agricultural income is not a recent phenomenon but rather existed from the 18th Century under the British era. The objective of the exemption was always to protect the farmers of our country, as India after independence was a primarily secretary economy. Hence, the need to protect our farmers was a priority, as the majority of the farmers still did not have access to adequate technology. But this exemption in recent decades could be seen as causing more harm than good to the economy, as it is seen as a primary source of tax evasion and money laundering. This has caused a huge loss of revenue for the government, affecting the growth and development of the country. The only way out of this problem is by curbing the tax exemption and bringing it under the ambit of taxation. At the same time, the government should carve out certain exceptions to protect small-scale farmers. A balanced approach is a must in addressing this important issue. It is important for the government to finally take a progressive action in this regard, such as the then Finance Minister Yashwant Sinha in the Vajpayee government, who decided to tax the income earned from renting out farm houses for marriages.The government should rise above the pressure created by large farming corporations and plug the tax leakage, thereby protecting the economy.
Authors are students at Institute of Law, Nirma University. Views Are Personal.