Why Agricultural Income should NOT be taxed in India

Since the time Chief Economic Advisor Arvind Subramaniam made a statement that India needs to tax agricultural income on rich farmers, editorial of every paper is speaking in favor of it. The whole idea of taxing agricultural income is to increase the tax base and hence generate more revenue. I, however, hold a different view due to below mentioned reasons:

1. Increasing the tax base - According to National Sample Survey, almost 90% farmers in India have less than 2 acres of holding. That means only a little over 10% of farmers would fall under the tax net. Amongst them, only 50% earns a substantial amount which would increase the government's revenue. That means the argument that taxing agricultural income would increase the tax base does not hold true. There are lakhs of small business houses who understate their income. Bring them under the tax ambit. Also, the accounts of NGOs, educational institutions, marriage halls etc which claim exemption under the category of Charitable Institutions need to be honestly and thoroughly checked. It would not only generate income for the state but would also solve many social problems like ever increasing school fees.The government should therefore concentrate on how to bring such entities under the tax net rather than taxing the farmers.

2. Increase in Government's Revenue - In India there are a little more than 4 lakh people claiming exemption of agricultural income. The case of Kaveri seeds and Monsanto India is generally put forward to support the claim as these two companies have claimed exemption in crores on account of agricultural income. My argument is that in order to tax these two companies, if we tax other farmers who though earn well but not as much as their other counterparts, it would be gross injustice to them. What the government should instead do is to stop the monopoly of these companies so that the income is distributed to other farmers as well. Make a level playing field, let other parties enter the competition an see the results.

3. What to tax and when - What should be the taxing event, when the output is produced or when it is sold in the market? What should be taxed? Is it the total output or the net output (Gross - self consumption)? Can all crops be taxed, whether commercial or otherwise? In a country like India which is heavily monsoon dependent, can there be uniformity in tax laws each year? Few months back there was a lot of hue and cry about the prices of Tur Daal. Can there be tax in such case when despite of bumper production our demand outpaced the supply and hence we have to resort to imports? Will it not worsen the situation by increasing the prices?

4. Accounting Issues - If big farmers are indeed to be treated at par with companies or professionals, they have to account for all the transactions carried on in their course of business. It is difficult to expect from the farmers to maintain the records. Making up a profit and loss account would be extremely difficult in such a case.

5. Increase in the prices of food articles - Taxing the agricultural income means increase the prices of the food articles. We are still struggling to keep the retail inflation within limits, any increase in the price of essential items would worsen the situation.

6. Political Suicide - Agriculture is a very sensitive issue in India. It is a sector which is often rocked with the news of farmers suicide. Taxing it would mean antagonising the sentiments of millions of Indians. Not only the farmers but also salaried class Indians empathize with them. On top of it the Opposition will make a lot of hue and cry and it is very unlikely that the law could be passed, just like the case of land ordinance. Thus, it is very unlikely that any political party would dare to take such step. Taxing it, at least for now, would be a political suicide.

In all the arguments making the news, the point which is lost is that the Income Tax officer has got the power to check the authenticity of the claim of agricultural income filed in the return. If they are unsatisfied with the claim they can disallow it. However, for that to happen our machinery needs to be transparent. The corruption in the Income Tax department is well known. Though the government has taken certain steps to clean the system, yet a lot remains to be done.

The government is desperate to curb the black money. Only if the government can check the exemption wrongly claimed by the people (including political parties), the need to tax it won't arise. There are lot many sectors which government can target to generate income, putting burden on the agricultural class is definitely not a work able idea. I rest my case.

Thanks for reading!