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ABSTRACT

Agriculture is considered as the backbone of Indian Economy, as agriculture is considered as the most imperative economic activity of man. Today agriculture has become the world’s most important industry with an inimitable branch of geography. Income earned from agriculture comes under the jurisdiction of state governments and the same is exempted from the axe of income tax. Many, committees were formed for imposing partial or some kind of method for levying tax on the agricultural income, but none of the measures ever saw the light of the day. The reason behind exempting agricultural income is plausible as most of the farmers have low level of income and the land that they owns is also marginal and trivial. But the question arises how far this exemption is justified keeping in mind that many rich farmers and agricultural companies having crores of turnover are also reaping the same benefit despite being well off and capable. This loophole in the taxing mechanism needs an exigent attention as many rich farmers and companies are able to evade tax by camouflaging taxable income and black money from agriculture. The paper would be dealing with the concept of agricultural income, the reasons behind why agricultural income should not be taxed followed by the reasons for a dire need of an efficient taxing mechanism and the hiccups that the government would face if they ever dare to introduce such mechanism.

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WHAT CONSTITUTES AGRICULTURE INCOME?

The definition of Agricultural income is quite wide as it not only includes agricultural produce but also includes various other things that has been defined under Section 2(1A) of the Income Tax Act, 1961. This section defines agricultural Income as:-

• Any rent or revenue derived from land which is situated in India, and is used for agricultural purposes

Any rent or revenue derived from land which is used for agricultural purposes is agricultural income. Rent or Revenue generated will be treated as agricultural income only if land is the immediate and effective source and not secondary or indirect source.

• 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

Income generated will be treated as agricultural if any process committed has been done so in order to render the produce fit to be taken to the market and that process must not have change its original character.

• Any income attributable to a farmhouse subject to satisfaction of certain conditions as mentioned in Section 2(1A)

According to the law, it is the duty of the officers of the government to assess the land revenue and where the situation is such that neither the revenue could be assessed nor is subject to any local rate, in that case the land should not fall within the jurisdiction of municipality or a cantonment board having a population of more than ten thousand (according to the last preceding census which has been published before the first day of the previous year in which the sale of land takes place); or it should not be situated:

1. more than 2kms. from the local limits of any municipality or cantonment board and which has a population of more than 10,000 but not exceeding 1,00,000; or
2. not being more than 6kms. from the local limits of any municipality or cantonment board and which has a population of more than 1,00,000 but not exceeding 10,00,000; or
3. not being more than 8kms. from the local limits of any municipality or cantonment board and which has a population of more than 10,00,000.

• Existence of a land.
• Usage of land for agricultural operations:

Agricultural operations means efforts induced for the crop to sprout out of the land. The ambit of agricultural income covers income from agricultural operations, which includes processes undertaken to make the produce fit for sale in the market. Both, rent or revenue from the agricultural land and income earned by the cultivator or receiver by way of sale of produce are exempt from tax only if agricultural operations are performed on the land.

• Cultivation of Land is a must:

For the purpose of exemption it is necessary that the land should have been used for agricultural purposes only. The ambit and scope of agriculture is wide enough and includes grains, fruits, tea, coffee, plantations, etc.

• Ownership of Land is not essential:

For rent and revenue to be treated as agricultural income it is necessary that assesse has an interest in the land either as an owner or mortgagee. However, in agriculture it is not necessary that the cultivator has to be the owner of land which means that any tenant or sub-tenant that cultivates the land for agricultural use is exempted from tax.[1]

EXAMPLES OF AGRICULTURAL INCOME

• Income from sale of replanted trees.
• Rent received for agricultural land.
• Income from growing flowers and creepers.
• Share of profit of a partner from a firm engaged in agricultural operations.
• Interest on capital received by a partner from a firm engaged in agricultural operations.
• Income derived from sale of seeds. 

WHAT DOES NOT CONSTITUTE AGRICULTURE INCOME?

Certain agriculture-related works and income generated through these channels do not fall in the category of agricultural income. These include:

• If a farmer sells processed produce without carrying out any agricultural or processing operations, the income would be categories as business income.
• When any rigorous procedure is followed for increasing the sale value of the produce, than the income generated from it would not qualify as agricultural produce. For example If mangoes produced in your farm are being turned into jams, than the income generated through the sale will be taxable as business income.
• Breeding of livestock ─ this includes dairy animals, fishery, poultry farming ─ on agricultural land is not agricultural operations.
• If trees were grown on the farmland just with the objective of selling them as timber at any later stage, than it will not be treated as agricultural income because no agricultural process has been concluded in the entire process.
• Those who earn their income by trading agricultural have to pay standard taxes on their income.
• If certain conditions are fulfilled than the agricultural income from exports could be exempted from income tax.[2]

NOTEWORTHY

If a taxpayer is earning non-agricultural income too, than in that case, both the incomes would be added in order to do the Tax calculation and benefits would be provided accordingly. But, it is to be noted that tax will only be computed if the taxpayer’s non-agricultural income exceeds the basic exemption slab.

HOW IS AGRICULTURAL INCOME TAXED

In India Agricultural Income is not taxable, so thereby any person having agricultural income as the only source of income will not be required to file their Income tax returns. But, if the taxpayer is earning besides the agricultural income like salary, house rent, business income etc. than that person is liable for filing his returns. The procedure for taxation of taxpayers having agricultural plus other incomes is as follows-

Step 1- Agricultural income is added to other incomes of the taxpayer assuming that it is taxable income. Hence, total income is calculated.

Step 2- Tax on such total income is calculated as per slab rates.

Step 3- Agricultural income is added to the basic exemption limit of taxpayer. Tax is calculated again on such income.

Step 4- Difference between both the above taxes is actual tax liability of taxpayer. Education cess, surcharge is added to this amount. And total tax payable is paid by taxpayer.[3]

Section 54B of the Income Tax Act, 1961

Section 54B of the Income Tax Act, 1961, provides reprieve to taxpayers who sell their land and use the sale proceeds from the land to procure another agricultural income. For claiming benefit under this section following conditions have to be satisfied:-

1. This benefit can only be claimed by an individual or a HUF
2. The agricultural land should have been used for at least two years either by the individual or his family preceding the date of the sale of land and in case of HUF, the land ought to be used by any member of HUF.
3. Also, the taxpayer should purchase another agricultural land within a period of two years from the date of selling of the previous land. In case it is an incident of compulsory acquisition, the period of acquiring new agricultural land will be assessed from the date of receipt of compensation. [4]

WHY AGRICULTURE INCOME SHOULD NOT BE TAXED

Farmers are exempted from paying agricultural taxes because as per the 2010-11 Agriculture census, over 95% of India’s operational holdings are below four hectares (10 acres) size. Also not many farmers within the bracket are able to draw more than 5 lakh annually. Such exemptions will not only ensure that income remains untaxed but will also ensure that the farmers work whole heartedly towards boosting the productivity of produce and use the best possible material for agriculture. The taxation exemption also allows the farmers, to carry forward their losses and depreciation on assets from year to year. Since, India is an agrarian economy where agriculture is considered as the spine of the country, so levying taxes on such a primary activity would be regarded as paralysing the economy.[5]

WHY AGRICULTURAL INCOME SHOULD BE TAXED

According to Mr. Benoy a member of the Niti Aayog, agricultural scheme should be taxed because it is no secret that India’s Tax base which stands at a miniscule rate of 6% of working population is lowest in the world, which unnecessary burdens the already overburdened formal sector. Also, the Aayog feels that there should not be any artificial distinction between rural and urban. So whatever is the parameter on personal Income Tax on urban side, must be same on rural side, provided the farmers go beyond the exemption limit. Due to the fact that there is presence of many rich farmers as well and there exists a strong justification for taxing them received support in the form of many policymakers and economists supporting the voice of Bibek Debroy. According to Mr. Debroy an appropriate tax policy should be developed for drawing a distinction between rich and poor farmers in order to bring the lost balance in the agriculture sector[6]. According to our constitution, central Government can’t impose tax on agricultural income. The power to impose tax on agricultural income lies with the states. But due to small and meagre earnings from farming activities, prospects of taxing agricultural income is still thin as a hair as 90 per cent of the farmers have a farm holding of less than 2 hectares. At present, only few states like Kerala, Tamil Nadu impose taxes on plantation sector.

Various RBI reports have showed that about 66 percent of households are in rural India and since they are outside the purview of taxation scheme, things get a little complicated and the economy goes for a toss. Taxing the agricultural income has become the need of the hour because now a days, many farmers and agricultural companies, in order to get spared from the axe of tax divert their money in the field of agriculture so as to subvert the taxation system. Savouring the benefits of such exemption are the Big Agro companies. The likes of Kaveri Seeds and Multinational Monsanto India have claimed exemptions amounting to crores and which have allowed them to make profits amounting in crores. This happens because Agriculture companies growing crops are also put in the same bracket as that of individual farmers. So, a taxation system in place will help in the development, replenishment of the nearly depleted agricultural sector. Thus imposing taxation up to a certain threshold will help the government in taxing the rich farmers and subsidize the poor.[7]

Levying taxes on Agricultural Income will provide scores of benefits as it will provide a true and a credible information regarding the financial position and income earning potentials of the farmers. Such verifiable information can help to separate conscientious and productive farmers from the unscrupulous or unproductive farmers and thus will save the poor farmers from the nepotism of availing bank credit and will further protect them from the mercy of private creditors. Levying taxes will also help the banks in eliminating strategic defaulters intending to weaken and exploit the law enforcement standards of the country. This taxation will also prove fruitful for the farmers as it will help them get loans on their documented and financial position records. Also, bringing agriculture within the tax dimensions will also improve the GDP and fiscal deficit of the country, which would in turn help the government in spending more money on social schemes.[8]

CHALLENGES IN TAXING THE AGRICULTURAL INCOME

The issue of taxing the agricultural income is a very uphill task as the whole process includes a lot of hiccups. The major being that the issue is so political that it will automatically ring in the negative points for anyone who tries to implement the same. The other being that this tax would be looked as a tax which plays with the life of nearly 600 million people, which no political party would dare to play with. Also, the majority of farmers in India, are socially and economically backward and most of them don’t own more than small pieces of land. So imposition of taxes on such income will only bring more misery for the farmers rather than development for the economy and country. Imposing agricultural tax in an agrarian economy is a tedious task as deciding upon tax slabs and the value of output or net income earned by farmers is a very herculean task and even if we consider the fact that somehow this tax gets implemented than the burden of it will have to be borne by the consumers as they would be required to shell out more than the required amount. The problem doesn’t end here, if we take a closer look of implementing this taxation perspective, than it will be found that levying taxes on agriculture will be a very daunting task as the output of agriculture depends on various external factors such as weather, availability of quality raw material, etc. Looking from a legal angle, it can be found that the power to levy taxes on agriculture rests only with the state governments and any debate revolving around changes in the same will lead to political turmoil, thus making the whole task next to impossible.[9]

Another important issue that needs consideration is what exactly needs to be taxed. Should it be the value of output or the net income that needs to be taxed? Since the value of output can easily be gauged and tracked but the net income from the crops is difficult to ascertain as a lot of expenditure is undertaken for growing crops and for those owning equipment a value of depreciation also needs to be computed which sometimes can be very tedious to ascertain. Also the surplus produce that does not enter into the market ends up landing at various warehouses, thus making it difficult to fathom the true value of produce.[10]

CONCLUSION

It is crystal clear that the government is willing to work towards bringing agricultural income at par with other activities. But doing this, the government has to do keep in mind regarding the structural issues that is being faced by the agriculture. In order to maintain a balance in the economy, the central government should distribute the tax ideally with the state governments so that the state governments don’t levy much of tax on the agricultural income. Also, the government should work with the states in developing a unified system of taxation, in order to ensure transparency and efficiency. Since, there are a large number of rich farmers and agricultural companies too savouring the benefits of exemption, the government should work diligently towards establishing certain tax thresholds for the same. Establishing a rigorous taxation system will also help in tracking persons who evades large transactions. It is very important that the government deal with this fragile topic in a sensible manner. To levy or not to levy tax on agricultural income is the discretion of the government but they need to be very vigilant in dealing with the same because a slight miscalculation can wreak havoc on the economy. So, policymakers are expected to tread carefully if they decide to move forward on a long overdue fiscal and tax reform in the agriculture sector.

 References

[1]Sunita Mishra, What is Agriculture Income, Prop Tiger (Oct. 14, 2018, 12:35 PM) https://www.proptiger.com/guide/post/what-is-agriculture-income.

[2]Agricultural Income and it’s tax treatment, India Filings (Oct. 14, 2018, 1:00 PM) https://www.indiafilings.com/learn/agricultural-income-tax-treatment/.

[3]Mitra, How is Agriculture Income Taxed, My IT Return (Oct. 15, 2018, 5:00 PM) https://help.myitreturn.com/hc/en-us/articles/219454808-How-is-Agricultural-income-taxed-.

[4] What is Agriculture Income, CoverFox (Oct. 15, 2018, 5:30 PM) https://www.coverfox.com/personal-finance/tax/agricultural-income/.

[5] Gudipati Kumar, NITI Aayog proposes tax on agriculture income: Pros & Cons, The Hans India (Oct. 15, 2018, 7:00 PM) http://www.thehansindia.com/posts/index/Young-Hans/2017-06-26/NITI-Aayog-proposes-tax-on-agriculture-income-pros–cons/308806.

[6] Yogesh Singh, Taxing Agriculture Income in India, Jagran Josh(Oct. 15, 2018, 8:00 PM) https://www.jagranjosh.com/current-affairs/taxing-agricultural-income-in-india-1494410251-1.

[7] Taking the rich farmers- Current Status of Farm taxes, Pros and Cons, GK Today (Oct. 16, 2018, 3:15 PM) https://www.gktoday.in/gk/taxing-the-rich-farmers-current-status-of-farm-taxes-pros-and-cons/.

[8] Tojo Jose, Why agriculture income is to be taxed? , Indian Economy (Oct. 16, 2018, 3:00 PM) https://www.indianeconomy.net/splclassroom/why-agricultural-income-is-to-be-taxed/.

[9]Issues with Taxing agriculture income, IAS Parliament (Oct.16, 2018, 4:00 PM) http://www.iasparliament.com/current-affairs/daily-news/issues-with-taxing-agriculture-income.

[10] Madan Sabnavis, We should tax Agriculture. But how?, Business Line (Oct. 16 , 2008, 4:15 PM) https://www.thehindubusinessline.com/opinion/we-should-tax-agriculture-but-how/article9677312.ece.