A controversial proposal by Bibek Debroy, a member of the government think tank NITI Aayog, to tax agricultural income above a particular threshold has led to a public exchange of views. Finance Minister Arun Jaitley quickly dismissed any plans to tax farm income , but more policymakers have begun to voice their opinion, the latest being Chief Economic Adviser Arvind Subramanian who made it clear that taxing farm income is a State subject. 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. But 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. Mr. Debroy suggested that an appropriate tax policy should draw a distinction between rich and poor farmers, thereby addressing the widespread political apprehension of bringing agriculture under the tax net. 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.
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. This includes, among many, reforms to the broken agricultural supply chain that still leaves farmers at the mercy of middlemen cartels. Such reforms are crucial if farming is to become a sustainable enterprise in the long run. Else, 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. In this context, the historical transition of labour and other resources from agriculture into other sectors is particularly useful to keep in mind. The said transition has been very slow in India; in fact, according to Census figures, the size of the farm workforce increased by 28.9 million between 2001 and 2011. This is due to a combination of factors, but one in particular is worth noting: the difficulty agricultural workers face in finding jobs in other more advanced sectors. A tax on lucrative high value farm ventures, which affects their ability to absorb labourers from low-value farming, could make life more difficult for farmers unable to make the cut in industry or services. Given this, policymakers ought to tread carefully as they move forward on a long overdue fiscal reform.
