INTRODUCTION
In India, “Agricultural Income” is exempted from payment of Income Tax (Sec. 10 (1), Income Tax Act, 1961 refers). The said exemption is without any limit. India is an agricultural country, and a substantial portion of its GDP comes from Agriculture. This exemption has been enjoyed by all farmers/agriculturalists for over 75 years now. The Act does not differentiate between rich farmers and poor farmers. Thus, the exemption is being enjoyed by the rich farmers also who should be kept outside the ambit of the same. In fact, it is being unduly availed by disclosing the non-agricultural income as “Agricultural Income”. It is imperative to check whether this exemption should be continued or otherwise.
OBJECT/PURPOSE OF THE EXEMPTION:
Normally, any exemption is granted by the Act to bestow a benefit on some section of society. The exemption is either full or partial and/or conditional or unconditional. However, this exemption is a blanket exemption. Entire agricultural income is exempted from Income Tax. No condition is attached to avail this exemption except that the income is an “Agricultural Income”. No specific purpose or object is given behind the grant of this blanket exemption. No effort was taken for the last 75 years to review this exemption. Though it looks like the exemption is treating the farmers with a great deal of consideration and sympathy, it is not that way, the elite farmers or the politicians do not think twice before taking advantage of this exemption.
There may be various reasons for not discontinuing this exemption. The first and foremost reason for not withdrawing this exemption is the lack of political will. Farmers make up a significant amount of the country’s population, and as a result, they are a powerful political force. The implementation of the agriculture tax will result in an increase in their overall costs. As a result, they will oppose the current government, and their chances of regaining power will rapidly diminish. No government would want to enrage such an amount of people and jeopardise their prospects of staying in power. This is a primary reason why India has not implemented an agricultural tax. Secondly, many parliamentarians have declared themselves as ‘farmers’ or ‘agriculturist’. They have been benefitted because of this exemption. They show their income as “agricultural income” and claim exemption from Income Tax. Lastly, agricultural income has been utilised to transform black money into white money. The majority of politicians and others who benefit from their patronage are misusing the “agricultural income” path to convert their black money into white money. For want of appropriate verification of the claim of this exemption results in the award of exemption on invalid earnings, leading to revenue loss to the government.
There are various adverse effects of this exemption on the economy. The major impact of exemption of tax on agricultural income increases the burden of tax on the manufacturers, service providers, etc. It has been observed by the Vijay Kelkar Task Team on Direct Taxes that non-taxing agricultural Income breaches horizontal and vertical equity. It enables non-agricultural revenue to be disguised as agricultural income, thereby making it a gateway for tax evasion. The Law Commission of India in its Forty-Ninth Report on the inclusion of Agricultural Income in the total income observed that the current exclusion of agricultural income acts as a loophole in the existing central income tax; it creates a route for unaccounted money, which has negative economic consequences.
NEED TO WITHDRAW THE BLANKET EXEMPTION:
The major reason for this is that it is only available to wealthy farmers. According to the National Sample Survey, 70% of agricultural households in India have marginal holdings of less than 1 hectare, while just 0.4% have holdings of more than 10 hectares. An agricultural tax of Rs. 25000 crore might be raised simply by taxing the incomes of the top 4.1% of agricultural families at a rate of 30% on average. Even homes with 4-10 hectares of land make up just 3.7% of all agricultural households. The agriculture business has traditionally been used as a tax hideaway. In the nine years between 2006-07 and 2014-15, there were 2746 revenue tax cases reported agricultural income above Rs. 1 crore, according to information supplied by the Income Tax Department. In the 2014-15 assessment year, agricultural income recorded for exemption in returns submitted up to November 2014 was Rs. 9338 Crore. Farmers with more than 4 hectares of land should be subjected to taxation. They make up just 4% of all agricultural families, yet they control nearly 20% of all agricultural income.
In order to dodge the tax axe, many farmers and agricultural businesses are increasingly shifting their funds to agriculture in order to evade the tax system. This exemption is benefiting the Big Agro corporations. This happens when agricultural companies that cultivate crops are included together with individual farmers. As a consequence, establishing a taxation framework will assist in the expansion and replenishment of the agricultural sector, which is nearly exhausted. As a result, levying a tax up to a particular level will assist the government in taxing the wealthy farmers while subsidising the poor. The tax exemption under the Income Tax Act has had little impact on small-scale farmers, while wealthier farmers have reaped the benefits by misusing it. The agricultural income tax exemption is helping medium and big farmers and agricultural businesses, which was not the intention. Further, taxing agricultural revenue will bring a wealth of benefits, as it will provide accurate and reliable information on the farmers’ financial situation and income-earning capacity. Such verified information can assist to distinguish conscientious and productive farmers from dishonest or unproductive farmers, saving impoverished farmers from bank credit nepotism and further protecting them from the mercy of private creditors. Taxation will also assist banks in identifying strategic defaulters who are attempting to undermine and abuse the country’s law enforcement norms. Farmers will benefit from these taxes since it will enable them to get loans based on their recorded and financial records. Incorporating agriculture into the tax framework will also enhance the nation’s GDP and fiscal imbalance.
CHALLENGES
To withdraw this exemption is not an easy task as there are certain challenges. To quote a few – most of the transactions in the agricultural sector are in cash, as not many farmers can read and write. It is harder to track and trace such cash transactions as compared to digital transactions. Agriculture is an unorganised sector; uneducated farmers don’t even keep track of their landholdings, so having a consistent income is a pipe dream. They lack the necessary paperwork in relation to their land, making it impossible to determine their resources and revenue. As a result, it is not a simple process. This works to the advantage of rich farmers and politicians. Owing to the increased expense on account of imposition of tax on agricultural income may dissuade farmers. This will result in a drop in production, which will have a negative impact on food security. The agrarian crisis is becoming worse, and farmer suicides are on the rise. With so many farmers committing suicide as a result of unpaid debts, low production, and low income, implementing an agriculture tax will almost surely increase the rate of suicide. In a country where 80% of the farming community comprises small & marginal farmers, many farmers do not hold land and work on contract, rich farmers would pass on the burden of tax on these farmers. Taxing agricultural revenue remains as thin as a hair due to limited and meagre earnings from farming operations. The Government must think of ways of increasing the income of the farmers before introducing a tax on agricultural income.
CONCLUSION
If tax is levied on the agricultural income, it will obviously increase the national revenue, but at the same time, it will harm the marginal farmers. But if tax is not imposed, the elite farmers and agricultural businesses will take advantage of it. That is why it is necessary to create a balance between the same. The tax slabs can be set in order to give the most protection to the most disadvantaged. The problem of blanket exemption is linked to poverty reduction and social security. Before the government considers taxing agricultural revenue, the stakeholders must first be in a position to pay the tax. As a huge number of wealthy farmers and agricultural businesses benefit from tax exemptions, the government should work aggressively to create specific tax thresholds for them. The establishment of a strict taxes system will also aid in the monitoring of those who dodge major transactions. The government has the choice to charge or not levy a tax on agricultural revenue, but they must exercise extreme caution in doing so because even a minor miscalculation might devastate the economy. As a result, if policymakers decide to move forward with a long-overdue fiscal and tax reform in the agriculture sector, they should proceed with caution.
Author(s) Name: Shreya Manoj Kasale (Asmita College of Law, Mumbai University)
