Should agricultural income be taxed?

May 26, 2017 12:41 am | Updated 08:00 am IST


Floating the idea of taxing income is a great disservice to the agrarian sector, which is in deep crisis, says Lakhwinder Singh.



The recent discussion on taxing farm income is nothing new. This kind of thinking was doing the rounds even in British India, when as early as 1925, a committee was set up to assess the feasibility of taxing agriculture income. The most famous attempt in post-Independence India was the K.N. Raj committee report of 1972, which also examined feasibility and implementation issues. The Kelkar task force report of 2002 estimated that 95% of the farmers were below the tax threshold. The underlying argument in the current discussion is to bring more people under the tax net to expand the tax base and also curb tax evasion because income from other sources is usually shown as agricultural income and thus evasion is easy. This, to my mind, is simplistic thinking, and similar to the argument forwarded in the case of demonetisation, which, the government said was to curb black money.

Let down by the state

If we look at the growth of agriculture in the post-reform period, the relative contribution of agricultural income to India’s gross domestic product has shrunk at an alarming rate. During the period 1991 to 2016, the share of agriculture decreased from 32% to 15%. Compared with this, the workforce dependence on agriculture is still very high, at 49.7%. Given the technological and environmental constraints, the performance of the agriculture sector has not been encouraging, and consequently, the welfare of the population living in the countryside has not visibly improved. This is the result of a deliberate policy of the Government of India to transform the economy by giving it a market orientation. As justified by the theory of economic transformation, the agriculture sector is expected to serve other sectors of the economy in terms of supplying raw material, investible surpluses and human resources. But quite deliberately, the terms of the trade are kept unfavourable to the agriculture sector. This is the standard process followed by countries around the world, and India is no exception to this rule.

Another important feature of the post-reform period that has been outlined by scholars is that the process of economic development has led to the concentration of income and wealth in a few hands, leading to the unprecedented rise of the number of billionaires in India. More than 70% of the income of billionaires comes from transfer of income — which is unearned income from other sectors of the economy. During the period of economic reforms, the gross capital formation of agriculture, which is the capacity to produce and an increase in productivity, has gone down tremendously and there is empirical evidence to substantiate this.

Diminishing incomes

Apart from this, rural social and economic services, which ought to have been provided by the government, have been found wanting. Education and health privatisation has increased the cost of rural households and the burden of all this has adversely impacted agricultural households. The average per month income of a farm household in India in 2012-13 as per the National Sample Survey Office was just ₹6,491. The income-expenditure gap for a majority of farmers is in the negative. More than one-third of the farmers have expressed their choice to leave the non-remunerative occupation. The agrarian distress has been deepening, and there has been a rise in farmer suicides. The agrarian sector is in deep crisis. Instead of finding a viable policy to solve the crisis, floating the idea of taxing farming income is a great disservice to the sector.





Have a slab of taxes like in other sectors and let each farmer pay according to his income, says Maruthi I.

Agricultural income must be taxed. This is a State subject and State governments —many of which are toying with the proposal — must, once and for all, take the decision. When we look back, we find that before Independence, farmers had to pay tax.

In the Hyderabad-Karnataka area I hail from, all through the 1930s and 1940s, the ruler imposed tax on the farmer’s produce. Over the years, as successive monsoons failed, a decision was taken to spare the farmer in independent India.

But while staple foodgrains were spared, horticulture/plantations in some States continue to be taxed as these are seen as commercial crops.

Tax the rich farmer

But herein lies the dilemma. Look around and you will see that it is the industrialist who is also in the services sector and is also the farmer, owning more than a hundred hectares of agricultural land. He is what I call an inactive farmer; he does not labour on the fields as the small farmer does. It is this big inactive farmer who protests the most when it comes to taxing agricultural income. For instance, it’s the rich onion and sugar cane and chilli farmers, all of whom own a lot of land, who are at the forefront of such protests.

We can develop our GDP only when our agriculture income is taxed. We do not even have a sense of the extent of agricultural income right now. My suggestion is, have a slab of taxes like we have in other sectors and let each pay according to his income from agriculture. The farmer with a small landholding of less than 2-3 hectares should be exempted from income tax. If the small farmer is a reality, so also are the big agricultural farmers with their luxury cars and rich industrialists who own farmlands. Here, if the government takes a decision to levy tax on their income earned from agriculture, the government revenue will not only rise but there will be an increase in the GDP ratio of agriculture.

Political indecisiveness

In 1972, a committee on agriculture taxation was headed by K.N. Raj recommended taxing the rich farmer. However, the committee’s recommendations were not implemented. Similarly, 80 years ago Dr. B.R. Ambedkar said he favoured taxing agricultural income. He was of the view that tax should be levied on tax-paying capacity or income of the taxpayer, and that the rich must be taxed more and the poor less. Ambedkar criticised the land revenue system of the British but held the view that income from agriculture must attract tax.

The Taxation Enquiry Commission, which was set up in the 1953-54, also recommended revision of tax laws by taking into consideration the prices of agricultural produce.

The fiscal policy introduced by the government in 1985 also recognised the importance of taxing agricultural income. In short, almost all commissions and agencies appointed or created by the government in the last 60 years have unanimously been of the view that agricultural income should be subjected to tax. But the million-dollar question is, who will bell the cat?

Fact remains that lawmakers cannot dare tax agricultural income without angering the powerful rural elite farmers and risking their vote bank.

Now is the time for devising new means of examining income from agriculture: taxing the rich industrialist who also owns corporate farms. It is time to bring them under the tax net.




One could have differential subsidies. Remove subsidies for irrigated farming, as opposed to rain-fed farming, says M.S. Swaminathan

Taxing agricultural income has not found favour mainly because of two factors. A majority of farmers in India — nearly 60% — are small farmers, with small holdings and a small marketable surplus. Their incomes are erratic. There is no climate insurance for them when the rains fail or in the event of floods. Droughts leave them reeling just as the fury of floods. Very often, when we talk of farmers, we assume they are all men — 40% of these farmers are women who do not have patta (title deed to the land they till) and do not have Kisan Credit Cards either.

Hostage to price fluctuations

To add to this, the market prices are variable. Even for crops like pulses, the prices have collapsed. Chilli farmers are currently facing the brunt of a collapse in price. An agricultural tax would add to the stress faced by the farmer.

I illustrate with these examples to show that we need to devise a method that takes into account agricultural income beyond a certain threshold. I’d say, don’t give subsidies after a certain threshold. Take them away. I am aware that the ultimate benefit of taxation will be far less that what is projected, and it will be executed to satisfy the taxman.

Acres have no meaning in agriculture. That should not be the criterion to tax the farmer. Markets and monsoon determine the fate of the farmer. And in some cases, external factors impact income. Even in Kerala, rubber plantations have collapsed. Coffee plantations have been affected by price fluctuations in Brazil and elsewhere. The question is, do we have a policy to protect farmers from imports when international prices fall sharply?

When we factor all this in, we can devise methods to tax agricultural income. For instance, I have often argued that one could have differential subsidies. Remove subsidies in the case of irrigated farming as opposed to rain-fed farming. A majority of the farmers are dependent on monsoons.

Incentivise agriculture

The most important concern should be food security, and we are still far away from realising that. We must strengthen agriculture to this end. Young people are not attracted to farming any more. To attract them to agriculture, you need to assure them of a certain income. We had recommended fixing the minimum support prices (MSP) for crops at levels at least 50% more than the weighted average cost of production.

For this, we said the procurement policy plus pricing policy and the public distribution system have to be factored in before there is any talk of bringing the sector in the income tax net.

Back in 2004, we had suggested strategies that ranged from the medium term for food and nutrition security in the country to move towards universal food security, to the long run, to work towards increasing productivity, profitability and sustainability of agriculture. Before we tax, we should aim at increasing the flow of credit, especially to those who are dependent on the rains, or in coastal and hilly areas, and aim for enhancing the quality and cost competitiveness of farm commodities to make them globally competitive.

I have always maintained that we must tax the rich farmer, and aim at bringing the small and mid-level farmers to levels where their produce becomes competitive. Offer incentives to them. But watch out for the corporate farmers.


As told to Anuradha Raman



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