Taxing Agriculture Income

What is the current status?
  • Agricultural income earned by a taxpayer in India is exempt under Section 10(1) of the Income Tax Act, 1961.
  • Agricultural income is defined under section 2(1A) of the Income-tax Act as:
    • Any rent or revenue derived from land which is situated in India and is used for agricultural purposes.
    • 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.
    • Any income attributable to a farm house subject to satisfaction of certain conditions specified in this regard in section 2(1A).
Why this topic is in news?
It is being said that the recent partial demonetisation and consequent scrutiny of high value bank deposits is aimed at bringing the Indian farmer under the tax net.
Past attempts:
  • In 1925, a committee was set up to assess the feasibility of taxing agriculture income
  • KN Raj committee: The most famous attempt in post-Independence India was the K.N. Raj committee report of 1972, which also examined feasibility and implementation issues
  • Kelkar task force: The Kelkar task force report of 2002 estimated that 95% of the farmers were below the tax threshold
Positives of taxing agricultural income?
  • A large portion of Indian farmers are illiterate or semi-literate and they do not maintain systematic books of accounts regarding their production and income. Hence, assessing their true income or income-earning potential becomes an onerous task for the bank loan officers.
  • So, often bank loan officers in India rely on informal networks created by social affiliations in order to elicit information about the borrowers. This provides opportunity to only those borrowers who are connected to the loan officers. Only these people obtain optimal credit.
  • Besides, loan officers are rotated every three years. This makes matters worse from a borrower’s point of view. Various studies have shown that a new loan officer entering a branch after job rotation restricts credit to borrowers who borrowed from the previous loan officer.
  • Also, it has been found that many farmers in India are making large cash deposits derived from non-farm sources but mask them as farm income.
Negatives of taxing agricultural income?
  • Agriculture is a state subject and there will be lot of opposition to this move.
  • Accessing their income and filing ITRs will be an uphill task for farmers.
  • Most of the farmers fall in the lowest income slab and hence they would still be exempted from filing ITRs
  • 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%. Thus, agriculture sector is already in great distress as it is giving very low return to those employed in it.
How tax on agriculture will help us?
  • 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

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