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Don’t tax the tiller: on the demand to tax agriculture income (hindu )

Even the net benefit of taxing agriculture isn’t worth the cost of monitoring and rolling out such a system

For peasants, the Mughal Empire was fundamentally an extractive state; a protection racket run riot. Typically, the land revenue share of a crop varied between 33% and 50%, depending on fertility, with a further 10-25% paid to the zamindar for his efforts. Its replacement by the East India Company and later the British government provided little respite. Zamindars were now granted hereditary and proprietary rights, with the rate of assessment fixed in perpetuity. The Company’s share was often fixed at 2/3rd of the gross produce received by the zamindars from the ryots. The consequences of such land revenue systems were stark — agricultural output grew at just 0.37% per annum between 1891 and 1947, with foodgrains at just 0.11% per annum, while commercial crop output rose by 1.31% annually; meanwhile the population rose at 0.67% annually. The colonial government pushed farmers into heavy debts and eventual pauperisation.

Post-Independence, the national and State governments sought to redress this. The Agrarian Reforms Committee of 1949 sought a programme of land reforms that would transform the actual tillers into owner-cultivators by a large scale. Instead, a step-by-step approach was adopted to abolish intermediaries, which encouraged zamindars to evict existing tenants instead, pauperising them further. The Central government did its part by seeking to not tax agricultural income, with most States following suit.

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Should agricultural income be taxed?

Pitfalls in the tax demand
However, with growth in agriculture rising, a demand for taxing agriculture income has arisen. Agricultural income declared by taxpayers, in returns filed till end 2014, for exemption was at ₹9,338 crore, with over 2,746 income tax cases declaring ₹1 crore agricultural income in the 2014-15 assessment year.

The estimated total annual agricultural income from cultivation and livestock, as estimated by the National Sample Survey Office, is at ₹4,16,092.5 crore, with the total income of the top bracket at ₹16,084 crore and that of the first two brackets, including households with over four hectares, at ₹83,433 crore.

Taxing 9,73,000 large farm holdings having greater than 10 hectares of land earning an average of approx. ₹5 lakh annually shall yield about ₹1,200 crore of agricultural income tax on varying crop conditions, consequent incomes and applicable tax rules.

We’ve tried this before. The K.N. Raj Committee on Taxation of Agricultural Wealth and Income (1972) sought to institute a progressive agriculture tax on agricultural income in a norm-based manner, with regional average crop yields defining levy rates in a universal manner. The recommendations were not accepted, given limited political and grassroots support.

However, there remain significant pitfalls with this demand. Given the level of informal occupation prevalent in agriculture, implementing an agricultural tax will not be easy. Any agricultural tax system would have to evolve crop-specific norms of return to the land, while accommodating external shocks like droughts, floods or pests. Furthermore, for imposing tax on value of goods produced, the mechanism would fail to take individual farm economics into account, thereby presenting a case wherein a farmer would be taxed even if he makes a loss on sale. It shall require administration to ensure exact estimate of crop productivity and realised sale price per crop harvested — a seemingly humongous task for all farmers. Lack of clarity on land titles and cropping patterns based on lease/share-cropping shall further introduce randomness to the system.

Further complications arise if farmers suffer from multiple crop failures followed by one successful crop, for the income in that period may be subjected for tax payment. Taxing agricultural incomes is an idea devoid of knowledge of farming practices as well.

Many farmers save seeds from one harvest for the next and the practice remains critical to running Indian agriculture — proposals based on value of goods produced would end up taxing such sustainable practices as well. For tax based on sales, it shall disincentivise farmers to sell through organised formal channels, thereby increasing risk to farmer’s income. Instead of raising agricultural income, we would trend back to age-old farmer pauperisation.

Not worth the effort
In addition, any crop-specific taxation would have to be traded-off against input subsidies, which are nationally uniform for fertilisers and vary on a State-wise basis for water and electricity. Should input subsidies, assumed to be high at the institution of the crop tax rate, fall in the future, the farmer would effectively lose out on both ends of the value chain. Any crop-specific taxation would have been locally based, with a national crop register not necessarily linked to which crops would be taxed in specific regions or States. The tax rates for the same crop in different regions could be different, inequitably ensuring arbitrage for some farmers.

Amidst all this, it is hard to determine if there would be net benefit to taxing agricultural revenues, even for rich farmers (defined on local thresholds), compared to cost of monitoring and rolling out such a system. Even a progressively structured taxation system would encourage fictitious ownership splits amongst rich farmers and their relatives. Even assuming a net take of approx. ₹1,200 crore, the potential increase in the Central government’s taxation revenues would be increased by about 0.1%, while input subsidies, currently totalling ₹35,784 crore in 2016-17, would face significant upward pressure. Is this truly worth the effort?

Agricultural taxation has historically been considered the third rail of Indian politics. While we harken about improving economies of scale in agriculture, such efforts send discouraging signals to large and medium farmers who seek to increase their produce through utilisation of better techniques, differing crop patterns and more judicious use of agricultural inputs. A nation-state where a farmer can be moderately rich one year and marginally poor the other cannot in good conscience tax their income.

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