PremiumThe British empire funded itself in India and drained large quantities of income back to the home country on a regular basis, tapping, primarily, India’s agricultural income. Land revenue, in other words, was a potent source of revenue, to collect which the colonial administration appointed collectors in every district and an elaborate administrative machinery under each. The relevant lesson from this bit of potted history for the current debate on taxing agricultural income is two-fold: there is considerable income to be taxed and a formal income tax levied by the central government is not the only way to collect the government’s due from this income.
The notion that agricultural income is not taxed is uninformed. The formal arrangement is not that agricultural income is exempt from tax; rather, it is that it is subject to tax but the taxation authority is the state government, whereas the Union government is the taxation authority for other kinds of income. Many state governments do levy tax on organized agricultural enterprises, such as plantations, and most collect land revenue, even if only paltry sums.
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More than four-fifths of Indian farmers are small and marginal farmers, and their income would be too small to fall within the taxable limit. Only income accruing to a relatively small proportion of rich farmers would be subject to formal income tax, even if the taxation of agricultural income were to be shifted to the Union government. The real problem with the tax exemption on agricultural income is that it becomes a major gash in the revenue pipeline, through which a whole lot of non-agricultural income leaks away from the taxman’s grasp.
A simple expedient might be to subject all returns that club agricultural and non-agricultural income to detailed scrutiny and treat false exemption claims as tax evasion that attracts heavy penalty. If that is done, it would rule out the kind of outright fraud that came to light in the Comptroller and Auditor General’s evaluation of tax data, of agricultural income seeking tax exemption in 2011-12 for a total amount that was 22 times that year’s GDP.
But there is one another factor that is relevant to the debate on taxing agricultural income but often gets short shrift. This is the repression of farm prices and the resultant skewing of the terms of trade against agriculture. To appreciate this, let us take a hypothetical scenario.
Farm exports are banned or restricted. Local storage limits on farm produce and missing transport and storage links depress farm produce prices below what they ought to be, even within a functional domestic market, although farmers do not get to realise world prices for their produce. At the same time, industrial output is protected from external competition via import duties, inflating industry prices. The net result is to transfer farmers’ income to industry without anyone noticing it. To buy a bag of seed or pesticide, the farmer has to part with more bags of grain than he would have had to, if grain prices were higher and seed and pesticide had not been subjected to heavy protection. Ditto for tractors, pumps and pipes for irrigation and other farm machinery. This applies to any industrial good the farmer purchases, whether biscuits, milk cans or cattle feed.
Repressed farm prices and inflated industrial prices, thanks to protection, transfer farm incomes to the industrial sector. There, the income is subjected to tax. So, are farm incomes wholly exempt from tax?
Of course, the reality is messier, with a whole lot of subsidy also flowing to the farm sector. These subsidies tend to be cornered by rich farmers, who get the benefit of free irrigation, free power and procurement at support prices that steadily ratchet up year after year.
The sensible course would be for the government to end farm price repression and restrict protection for industry to a low, uniform rate, say 5%, bring transparency to the subsidy regime and subject income tax returns to rigorous scrutiny. Rich data on Goods and Services Tax, bank credit and modern data mining techniques can be used to estimate all incomes fairly accurately. State governments that do a good job of tapping their tax base should be rewarded with bonus transfers from the Centre, while those that do not exploit their tax base should be penalized. And the underlying data released to the public, so that the people of every state know for whom their state governments work, whatever their election slogans.
Yes, farm incomes should be taxed, but some reform must precede such a step.
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