Source: The Economic Times

Finance minister Arun Jaitley was correct when he stated in April that constitutional constraints do not empower his government to tax agricultural income, implying that he is not constrained from amending the Income-Tax Act. B R Ambedkar, in framing the Constitution, was vehemently critical of British land revenue system, the foundation for which was laid during the Mughal period, and strengthened by the East India Company, which was then incorporated under the Government of India Act, 1935, by which land revenue was assigned to states.

The 1935 Act was incorporated in our Constitution in 1950, using which state governments have developed their land revenue system. Ambedkar, participating in the Bombay Legislative Council debate, felt that the system was inequitable and indefensible.

He advocated a tax on business and agriculture based on earning potential. A fresh assessment is required today to gauge land revenue and tax levied by states, and its importance for the states’ fiscal machinery.

The definition of ‘agricultural income’ under the tax statute is subjected to a liberal interpretation by the judiciary. Tax-exempt income includes not just what is derived from the sale of farm produce, but also rent from farm land, income from the processing of farm produce, farm income and capital gains on sale of farm land. Further, the entitlement is for all forms of taxpayers: individuals, partnership firms, Hindu undivided families (HUFs), companies, cooperative societies, etc.

It covers all forms of agricultural produce, including crops covered under minimum support price, produce consumed for domestic use and exports, large-scale mechanised farms, orchards and groves, and tea, coffee, tobacco and rubber plantations. Interestingly, under the new goods and services tax (GST) law, the term ‘agriculturist’ (not agricultural income) means an individual or an HUF who cultivates himself, or uses family labour or hired labour under personal supervision. The GST law, therefore, applies to a limited category of agricultural income.

Attempts have been made in the past to amend the income-tax law to prevent abuse. Exemption is believed to be the most active instrument for tax evasion, as borne out from findings of successive expert committees, the Tax Administrative Reforms Commission being the last one. So, the first task would be to assess the political will to restrict such exemption, not just under the tax law but also under the Constitution.

Astated objective to grant exemptions to small farmers with marginal holdings, or those covered under land ceilings of respective state laws, can be carved out. This will leave out a major part of the rural economy. As a2012 right-to-information reply reveals, almost eight lakh taxpayers disclosing farm income shall come under the tax net, presuming they don’t fall under the ‘small farmer’ category.

The 2017 amendment seems to curtail all forms of cash transactions above Rs 2 lakh, and possibly mandates visibility of all high-value agricultural transactions, thereby limiting the scope for tax evasion. The Income-Tax Act can be further amended to provide for mandatory maintenance of books of accounts as a precursor to availability of tax exemption and also subject to satisfactory explanation of any diversion of income from non-farm to farm.

As a good practice, the Budget documents should contain details of tax forgone (by states) due to exemption. As an ease of administrative measure, the taxable category could be divided under three groups: one, those who are fully exempt; two, by prescribing a suitable threshold, those who would be liable to pay tax on a presumptive basis, say, 8-10 per cent of gross sale proceeds; and three, those whose turnover exceeds Rs 2 crore and are liable to be taxed at normal rates.

This will accentuate to tax extension of crop activity such as agro-processing by large units, particularly ones benefiting from rural credit, concessional electric power, etc. This shall promote large-scale activity, the potential of which remains untapped.

Alternatively, and to alleviate difficulties, a distinction can be made between crop-type activity and plantations, which are easily locatable sources of agriculture activity. Levy of tax on agriculture can be restricted to plantations and commercial crops, keeping in mind earnings potential, measured by land holdings.

To deal with constitutional constraints, the tax collection machinery can be implemented by the Centre, which shall ensure uniformity of tax, consistency in administration, and its net proceeds be fully assigned to states. Experiments with various states on the levy of land revenue and agriculture tax have been patchy. This could be a path-breaking reform, if implemented.