Why Arun Jaitley was quick to dump Bibek Debroy's proposal to tax farm income

It has long been argued that the government should tax agriculture income to increase its tax base.

The idea has been proposed and disposed of many times in the past few years, with the latest being from NITI Aayog Member, Bibek Debroy, who, in a press conference, argued that the government should “tax the rural sector, including agriculture income above a certain threshold”.

But within 24 hours of Debroy's statement, Union Finance Minister Arun Jaitley termed the idea as Debroy's 'personal' opinion, with no endorsement from the government.

It is important to remember that various economists have argued in favour of taxing rich farmers in the past.

In 1975, a committee headed by KN Raj and, more recently, the Parthasarathi Shome-led Tax Administration Reform Commission, had recommended taxing large farmers.

But then, why has Jaitley refused to endorse Debroy's idea?

A backgrounder

As per section 10(1) of the Income Tax Act, agricultural income earned by the taxpayer in India is exempt from tax.

Agricultural income is defined under section 2(1A) of the Income Tax Act. It means:

(a) Any rent or revenue derived from land which is situated in India and is used for agricultural purposes.

(b) 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.

(c) Any income attributable to a farm house subject to satisfaction of certain conditions specified in this regard in section 2(1A).

d) Any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income.

Won't make much difference

According to Abhijit Sen, who was member, agriculture, in the erstwhile Planning Commisison, taxing agriculture is waste of an idea. “The number of people who come under the tax net would be very small. Most of the Indian farmers have very small holdings. So, they would anyway not fall in the tax bracket. If the government tries to identify taxable farmers, the count would come to one or two farmers per village. That would make it a very difficult exercise to tax a small number of rich farmers.”

The NDA government has been looking at ways to increase taxpayers' compliance. In India, around 3.5 crore people file income tax returns, out of which, only 3% pay tax. The low tax compliance rate has forced the government think tank to look at ways to increase the tax base in the country.

Constitutional hurdle

Apart from the fact that the actual number of farmers who would fall in the tax bracket is very low, the government faces another hurdle in terms of a Constitutional barrier.

Agriculture is a state subject, and the Centre will have to go for a Constitutional amendment to get the right to tax farmers in the country.

Given that the Goods and Services Tax (GST), which also required a Constitutional amendment, took over 10 years to be passed by Parliament, it would be difficult for the current government to convince itself to go through another ordeal to get a small number of rich farmers under the tax bracket.

Black money

Arun Kumar, professor at Jawaharlal Nehru University, who has extensively researched on the black money economy, says: “Most businesses make black income through under or over invoicing in the services sector. You can open a small office or shop and can make Rs 10-20 lakh income. Still, the government is not able to collect taxes from a sector which accounts for close to 60% of the GDP and which is based out of urban areas.

“On one hand, agricultural income cannot be huge. Not even 1% farmers would be in a position to generate black money, and even that money would not be big. And they are spread across the length and breath of the country. I think if the government wants to curb black money, it should focus on the services sector rather than the agriculture sector.”

Is there a more fruitful way?

According Rahul Garg, Partner, Tax, PwC: “Instead of focusing on farmers, the government should focus on people involved in the allied activities. Many people who do not farm are involved in renting out their tractors, equipment and other services. The government should make an attempt to identify such activities and see if those people can be taxed, to increase the tax base in the country.”

All in all, the idea of increasing the tax-to-GDP ratio by bringing farm income within the ambit of income tax is too costly, and holds little promise.

This is perhaps why Jaitley was quick to dump the idea proposed by one of his government's celebrated economists.