Time to bring rich agriculturists within income, wealth tax net

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By: Saurabh Gupta on Wednesday, July 23, 2008, 11:19:44 AM

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Agricultural income is totally exempt from tax for umpteen years. Strangely enough, no voices are raised regarding its taxation. There seems to be no grounds to keep such income totally outside the tax net.

There are very rich agriculturists, having enormous income and wealth from agriculture by growing commercial crops, who live in luxurious farmhouses in the vicinity of metros and other big cities, derive substantial income from agriculture operations, travel in AC cars and undertake foreign trips frequently.

Obviously, such persons do not deserve to remain outside the tax net. Exempting them from tax makes the tax system farcical, discriminatory and inequitous. Such exemption helps in tax evasion as havala entries are given by agriculturists to others to convert their black income into white.

The Kelkar Taskforce has made a convincing recommendation for taxing agricultural income. As per the Taskforce, exemption of such income from income-tax has led to the following consequences:

• Distortion both horizontal and vertical equity;

• Sore feeling among non-agricultural taxpayers for sparing agriculturists from the tax net;

• Encouragement to laundering of non-agricultural income as agricultural income, creating a conduit for tax evasion.

Hence, the Taskforce recommended:

• A tax arrangement should be designed whereby states should pass a resolution under Article 252 of the Constitution authorising the Central government to impose tax on agricultural income.

• Tax from agricultural income for the purposes of allocation between states will be the difference between the tax on total income (including agricultural income) and the tax on total income net of agricultural income.

Where a taxpayer derives agricultural income from different states, the revenue attributable to a state will be in the ratio of the income derived from a particular state to the total agricultural income.

A separate tax return form should be prescribed for taxpayers deriving income from agriculture.

There are obvious flaws in the recommendations of the Task Force. Recommendation (d) seems to proceed on the ground that there is a clear cut classification of taxpayers as (i) agriculturists & (ii) non-agriculturists. This is not so. There is also a category of taxpayers, who derive incomes both from agriculture and non-agriculture operations.

Hence, separate returns for agricultural income are not necessary. A separate page in the existing returns (may be of different colour) will do for showing income from agricultural operations.

The other three recommendations mentioned at (a) to (c) above are, prima-facie, not implementable . Opposition is inevitable from the state governments, where governments of different ideologies are in power and also because some state governments are already imposing tax on agricultural incomes. Hence, state governments are most unlikely to pass the resolution under Article 252. The suggestion is, thus, never likely to be activated.

There cannot be two opinions on the issue of taxation of agricultural income. The Taskforce has correctly mentioned the consequences of keeping agricultural income out of the tax net. Hence, a firm decision on this is the need of the time.

The following is the practical way of taxing agricultural income in the initial stages. To start with, incomes arising from cash crops only be taxed by amending the definition of agricultural income in the I-T Act, saying that particular categories of operations would not be agriculture.

No constitutional amendment for this is necessary. A bill for amendment can be introduced with the President's consent. After this is done, the income arising from growing of excluded crops can be taxed in view of the relevant decisions of the Supreme Court and the high courts.

In the initial years, higher threshold limit can be fixed for taxing agricultural income. How the tax proceeds relating to agricultural income should be shared between the Centre and the states can be left to the decision of the Finance Commission.

In the matter of taxing agricultural wealth, there is no restriction of any kind. Actually, by the Finance Act, 1969, the capital value of agricultural land was included for the purpose of computing the net wealth subject to certain exemptions. But, from the assessment year 1992-93 , such tax was withdrawn without mentioning any reasons.

The problems relating to taxation of agricultural income and wealth are not such for which solutions cannot be found. What is lacking is political will. A beginning for taxing rich agriculturists under the IT & WT Acts can be made by the Finance Bill, 2008.

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