Any suggestion that farm incomes should be brought under the tax ambit tends to send Indian politicians into a tizzy. Recently, a comment by economist and Niti Aayog member Bibek Debroy that rich farmers could be taxed forced Finance Minister Arun Jaitley to hastily clarify that the government was not planning any steps towards taxing farm or agricultural income. Even Niti Aayog distanced itself from Debroy's comment, saying it was his personal opinion and not a recommendation made by the institution per se.
From the government's point of view, farm tax proposals are a political hot potato. Roughly, half of the country's working population is still directly or indirectly employed in farming or farm-related activity. But the vast majority of the cultivators barely manage to eke out a living from farming activities. Many are highly indebted, and very few of them can ensure a steady income from farming activities. Erratic monsoons, small land holdings, low productivity, pests, lack of capital and equipment, unremunerative prices of his cultivation - all these tend to plague the average Indian farmer. By the government's own count, about 12,000 farmers and farm labourers have committed suicide every year since 2013, mostly because of their debt burden. In 2015, farmer suicides accounted for 9.4 per cent of all the suicide victims in the country.
The fruits of economic liberalisation and the rapid growth of the country's economy since the 1990s have yet to reach the average farmer. In fact, farming incomes have grown so sluggishly since Independence that the prime minister talked of his government's wishes and efforts to double farming incomes by 2022 (that is, five years from now). To put how ambitious a target that is, consider this: one economic study estimated that Indian farm incomes took up to 22 years to double in real terms.
Then there is the small detail that the Indian Constitution bars the Central government from taxing farm incomes, though state governments are free to do so. (So far, only two states tried taxing farm incomes many years ago, but both quickly backed out. A few others have passed laws on farm incomes, but do not actually tax any agricultural income.)
On the other hand, most economists and the tax authorities point out that the tax exemption given to farm incomes can and are often abused by rich businessmen and politicians. Debroy certainly was not talking of the poor and marginal farmer. Arvind Subramanian, Chief Economic Advisor to the government, also talked about taxing rich farmers. There are highly profitable companies that declare crores of rupees as agricultural income and get an exemption on it. For example, the annual report of Kaveri Seeds shows that it claimed `186.63 crore as farm income that was tax exempt in the year 2014/15. Monsanto India, a subsidiary of the Monsanto (US), claimed `94.4 crore as tax exempt farming income, while tea company McLeod Russel claimed `73.1 crore as tax exempt agricultural income.
Even in 2012/13, there were 904,400 taxpayers who sought income tax exemption of `18,759.63 crore by showing the amount as agriculture income - and hence tax exempt. According to the Income Tax department, between 2006/07 and 2014/15, there were more than 2,746 cases where a farm income of over `1 crore had been declared. Whether these were all genuine cases of farm income is still to be verified. During the demonetisation months, there were several news reports, based on income tax sources, that excess cash was being deposited by enterprising businessmen as farm income.
While taxing farm income is politically unpalatable, it does make sense for the government to look at the anomalies in the tax provisions and remove them. It could also look at closing loopholes that allow abuse of the tax exemptions.
Even what constitutes farm income needs to be examined closely and rationalised. Horticulture is exempt but poultry or dairy farming is not. So, a rich horticulturist will not have to pay income tax, but a relatively less affluent poultry farmer will enjoy no such exemption. Similarly, transfer of land is also treated as farm income and exempt if it is either agricultural land in rural areas or even land in urban areas, which has been used for farming for three years. If someone can show that the rental income is from a house located in a farm land, even that is tax exempt. Income obtained by the sale of seeds is considered farm income, but bee-keeping and honey production is not tax exempt. Agricultural operations that include processing of farm produce which is then sold to the market is also generally considered farm income (though certain plantation crops are kept out of this ambit). Exam- ining the list of things that constitute farm income and those which do not constitute it can be a first step for the government.
The other issue, pointed out by many experts, is that only rich farmers can afford to keep records that give details of how farm income is calculated. Farming is like running an enterprise. What you get after selling your produce is your revenue. But it is not your income in the true sense. Because you incur costs of seeds, irrigation, labour, pesticides, fertilisers, etc., for raising the crop and the income is to be calculated only after deducting those expenses from the revenues you earn. The problem of record keeping can be sorted out by asking all farmers who declare income of over `50 lakh to keep details of their expenses and revenues, if they do not already do so. Alternative solutions like the ones used to calculate the profits of SMEs could also be applied for rich farmers. (For businesses with revenues of up to `2 crore per annum, 8 per cent of the turnover is calculated as the presumptive profits. And 6 per cent is the gross receipts are received through digital means.)
These steps are unlikely to create any political furore. And it would be a start to closing a loophole that has been exploited by a handful of rich assessees.