Background
As the sun sets on the fertile fields of India, casting a golden glow over the nation’s agricultural landscape, a lingering question emerges from the shadows: Should agricultural income be subjected to taxation? In a nation where the roots of prosperity are deeply embedded in the soil, the idea of taxing the very essence of sustenance has long been a subject of debate. The British, seeking to augment revenue, initiated income taxation in 1860, including agriculture within its ambit. However, their enthusiasm waned as the Zamindari system took hold. This system, marked by the appointment of landlords who controlled vast tracts of farmland, led to the exploitation of small farmers who toiled for meagre returns. The British, realizing the inequities embedded in the system, stepped back from taxing agricultural income. This trend continued even after India gained independence, with princely states and provinces inheriting the authority to determine agricultural taxes. Over the years, attempts to tax agricultural income were made in states like Kerala, Assam, and Uttar Pradesh but were eventually abandoned. The prevailing belief was that farmers, already burdened with the Zamindari system’s remnants, would struggle with additional tax obligations. The administrative and political hurdles further dissuaded policymakers, solidifying the status quo. Fast forward to the present, and India finds itself at a crossroads. With advancements in agriculture, rising income levels, and amendments to land ceiling acts, the landscape has evolved. Large swathes of agricultural land are now owned by individuals and corporations, prompting the question: Is it time to impose a tax on agricultural income?
Taxation of agricultural income
The Constitution of India, under Entry 46 of the State List (List II), empowers state governments to levy and collect taxes on agricultural income. The Constitution of India grants the exclusive power to tax agricultural income to state governments. Therefore, in section 10(1) of the Income Tax Act, 1961, agricultural income earned by the taxpayer in India is exempt from income tax. Agricultural income is income derived from agricultural operations, including the sale of agricultural produce, according to the Income Tax Act. The definition of agricultural income is specific and pertains to income derived from agricultural activities, such as the cultivation of crops, livestock, or the sale of agricultural produce. Therefore, certain types of income related to agriculture may not qualify for this exemption. For example, income from agro-processing industries or the sale of agricultural land may not be treated as agricultural income for tax purposes. Income from allied agricultural activities, such as poultry farming, dairy farming, and pisciculture, is not considered to be agricultural income and is therefore taxable. Income from allied agricultural activities, such as poultry farming, dairy farming, and pisciculture, is not considered to be agricultural income and is therefore taxable. Therefore, income from the cultivation of crops, sale of agricultural produce, such as fruits, vegetables, and flowers, from the production of milk, eggs, and other livestock products, or from raising poultry and fish is exempt from taxation. Meanwhile, income from the processing or manufacturing of agricultural produce, from the sale of seeds, fertilizers, and pesticides, from the rental of agricultural land, or agricultural tourism is taxable. Since agricultural income is exempt from income tax, individuals engaged in agriculture are usually not required to file income tax returns unless their total income, including non-agricultural sources, exceeds the basic exemption limit.
Why agricultural income is not taxed?
The exemption of agricultural income from taxation in India is rooted in historical, economic, and social considerations. Advocates of this exemption argue that taxing agricultural income could have detrimental effects on the agrarian economy, rural livelihoods, and food security. The exemption traces back to the colonial era when the British, recognizing the significance of agriculture in India, decided to exempt agricultural income from taxation. This approach aimed to encourage agricultural production and ensure food security, considering India’s predominantly agrarian economy at the time. Agriculture has traditionally been the backbone of India’s economy, providing sustenance to a significant portion of the population. Taxing agricultural income could be seen as a risk to the stability and growth of this crucial sector. On the other hand, agricultural income is highly variable and dependent on factors beyond the control of farmers, such as weather conditions, pests, and market fluctuations. Taxing such unpredictable income might place an undue burden on farmers during challenging years. Further, the agrarian landscape in India is diverse, with a vast majority of farmers owning small and marginal holdings. Taxing agricultural income could disproportionately affect these small-scale farmers who may already face economic challenges. Many individuals and families in rural areas depend solely on agriculture for their livelihoods. Taxing agricultural income could directly impact the financial well-being of these communities, potentially leading to increased poverty and migration to urban areas. Unlike in urban settings where individuals often have diverse sources of income, rural areas may lack alternative avenues for earning income. Given the pivotal role of agriculture in ensuring food security, policymakers often argue that exempting agricultural income from taxation helps maintain a robust and self-sufficient food production system. Taxing farmers might be perceived as counterproductive to the goal of achieving food security. Apart from the economic and political concerns, determining the actual income from agriculture is also challenging due to the diverse nature of agricultural practices. Establishing a robust system for verification and monitoring of agricultural income could be logistically complex and costly. Implementing and administering a tax on agricultural income would require significant administrative capacity.
Why agricultural income should be taxed?
At the core of the argument lies the principle of equity. In a nation where all streams of income bear the tax burden, exempting agricultural income creates a dissonance. This exemption breeds horizontal inequality, where individuals with comparable earnings find themselves taxed differently based on the origin of their income. The wheels of progress require funding, and taxing agricultural income emerges as a potential reservoir of resources. The revenue generated could become the lifeblood for investments in education, healthcare, infrastructure, and public goods that stand to benefit the entire nation, including its diligent farmers. The current exemption has become a canvas for tax avoidance strategies. Wealthy individuals exploit this loophole, evading taxes on their non-agricultural income. Taxing agricultural income acts as a check against such practices, fostering a fairer tax landscape and ensuring every citizen contributes their due share. Meanwhile, progressive taxation on agricultural land or revenue could usher in a transformation in land utilization practices. By curbing land hoarding for speculative gains, encourages a more efficient and purposeful use of this precious resource, aligning with sustainable agricultural practices. The myriad agricultural development projects beckon for financial sustenance. Taxing agricultural income emerges as a strategic source to fund these initiatives, reducing reliance on government borrowing and ensuring the holistic development of the agriculture sector.
Echoes from history resonate as we consider the paths of industrialized nations like Japan, China, and the Soviet Union. Taxing agricultural income could become the catalyst for mobilizing resources, propelling India’s journey toward industrialization and economic diversification. Verified income tax returns not only legitimize farmers’ earnings but also open doors to financial opportunities. Access to loans and financial support becomes more accessible, empowering farmers to invest in their farms, enhance productivity, and break the shackles of financial constraints. Taxing agricultural income could be the impetus for a seismic shift in the dynamics of farmer representation. Encouraging the formation of associations and active participation in policy debates, it empowers farmers to demand accountability and assert their rightful role in shaping the trajectory of development. By incorporating agricultural income into the tax net, the government nurtures a culture of savings among farmers. This not only elevates financial well-being but also acts as a bulwark against poverty, fostering a future where farmers reap the rewards of their hard work.
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