India: Taxing the untaxed: Why govt should tax agricultural income

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The Tax Administration Reform Commission report in 2014 re-echoed the 2002 Kelkar Committee report which revealed how exemption to agricultural income is being misused. The reports perceived agricultural incomes tax exemption as a tool of tax evasion and money laundering. The Comptroller and Auditor General of India tabled the audited processes the income tax department {ITD} follows for allowing such exemptions before the Parliament in July 2019. The CAG reviewed 6,778 cases out of 22,195 scrutiny assessments the ITD had carried out between FY15 and FY17 of those who had claimed more than Rs 5 lakh in agricultural income. In those cases, the agricultural income of Rs 3,656.25 crore was claimed of which Rs 2,544.21 crore was allowed. According to the CAG report, agricultural income in line with section 2{1A} of the Income Tax Act of 1961 means any revenue or rent derived from land in India used or agricultural purpose or any income attributable to a farmhouse subject to fulfilment of conditions specified in the act, it can also mean any income derived from saplings or seedlings grown in a nursery. Tax on agricultural income falls under the state list meaning that only state governments can levy income tax on such incomes and not central government. This too has been explained by the CAG report: agricultural income is considered for determining the tax rate to be applicable to non-agricultural income for entities who are also claiming agricultural income. Thus, the ITD – a central government agency – comes into the picture.

A retired income tax officer, Vijay Sharma, went to Patna High Court in 2016 after obtaining an RTI reply (in 2015) from the Directorate of Income Tax (Systems) on disclosures of agricultural income between AY (assessment year) 2004-05 and AY 2013-14. The Kelkar Committee and the third TARC reports were very scathing in their observations but did not provide any evidence. This is rather strange given the fact that these were the finance ministry projects and had the power to seek all relevant data. The study had also pointed at the growing presence of corporate sector in agriculture and that more than 50 companies reported income of over Rs 100 crore from agriculture in FY10 – totalling Rs 31,313 crore. Here is a back-of-the-envelope calculation taking the NIPFP’s 2012 study as the basis. At 1.2% of the GDP in FY20, the loss of revenue from agricultural income would amount to Rs 2.45 lakh crore – taking the GDP size for FY20 to Rs 20,442,233 crore at current prices, as per the NSO’s first advance estimate released last month. This would be 11% of the gross tax revenue (RE) projected for FY20 (Rs 21.63 lakh crore) in the last budget. There are other reasons why this matter. Exemption undermines equity, increases tax rates The Kelkar Committee listed two reasons for taxing agriculture, to which the third TARC report added one more (reason). One, an exemption to agricultural income distorts horizontal and vertical equity – those getting exemptions are at an advantage over those earning equivalent level of income from non-agricultural activities (horizontal equity) and exemption fails to distinguish between the poor and the rich farmers (vertical equity). Second, exemption “encourages laundering of non-agricultural income as agricultural income, i.e., it has become a conduit for tax evasion”. Third, a narrow tax base leads to a higher tax rate structure and burdens other taxpayers. This is not as simple as it may sound. It is a politically sensitive issue with few takers even though the reasons for the same may challenge reason. Nevertheless, the third TARC report of 2014 advocated taxing agricultural income. In one single paragraph, it laid out how this could be done and what are the challenges.