Taxation of agricultural income has been in the eye of storm recently. While adverse impact of such taxation on farmers has been a primary concern, the need for resource mobilisation brings the debate back to the limelight regularly. However, in my view, the debate is not supported by appropriate facts. The test of any fiscal policy is to see the number of people likely to be affected by it and what is the revenue implications of the intended policy. In our context, this involves interplay of macroeconomic conditions on growth income and prevalent tax laws. So, it is only when we take into consideration the exact operation of Income Tax Act 1961(henceforth, called the IT Act 61), the legal basis of taxability or otherwise, of any income in India, that we can quantify the impact of the policy implication. Hence, it is intended to revisit the issue of taxing agriculture income to delineate the group(s) likely to be affected and also to estimate revenue gain if tax on agricultural income was to be levied.
Agriculture income as per Income Tax Act
Income tax is a legal charge, through the operation of IT Act 61, on incomes earned in a year, by different legal entities like individuals, Hindu Undivided Families (HUFs) and companies etc. Under Sec 10(1) of the Act, agricultural income is exempt from taxation. In turn, agricultural income has been defined in Sec 2(1A), as:
“Agricultural Income means
(a) any rent or revenue derived from land which is situated in India and is used for agricultural purposes, or
(b) any income derived from such land by:
(i) agriculture; or
(ii) the performance by a cultivator or receiver of rent-in-kind, of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him, fit to be taken to the market; or
(iii) the sale by a cultivator or receiver of rent-in-kind in respect of which no process has been performed other than a process described in the above paragraph; or
(c) any income derived from any building and occupied by the receiver of rent or revenue of such land, or occupied by the cultivator or the receiver of rent-in-kind of any land with respect of which or the produce of which any process mentioned in (ii) and (iii) above is carried o………...”
Agricultural income, as is defined, sets the boundaries of what is taxable in the context and what is not. Therefore, as per law, agricultural income which is exempt from tax, is only such income which is derived from agricultural operations or sale of produce from agricultural land by the producer or rent from building located on such lands. Consequently, we can see that income from dairy farming, fruit processing, trading in grains, poultry, fish farming or bee hive activity etc. shall get excluded from being characterised as agricultural income while that from orchards, and tree felling on agricultural land are. Plantations would ordinarily be generating agricultural income if no further processing is done e.g. items like tea, coffee or rubber etc. So, for all practical purposes we are talking of cultivators here when we talk of agricultural income.Clearly, this goes against the commonly held perception that almost the all incomes generated in rural economy has the character of agricultural income and consequently is not subject to income tax.
Besides Sec 10(1), we should also mention Sec 2(14) read with Sec 45 of the IT Act 61, which renders capital gains on transfer of agricultural land exempt from taxation. Further discussion on the same is beyond the scope of this article.
Who will get taxed?
In case the government withdraws exemption u/s 10(1) to tax agricultural income, will it adversely affect the large rural populace that faces vagaries of monsoon and no fixed income? It is important to note that income from both the agricultural sector and the non-agricultural sector is the same once it reaches the hands of the recipient. If levied, taxes will be payable only above the threshold levels fixed by the Finance Act of the year. At present, no tax can be levied on individual income up to INR 2,50,000 per annum. So, only such individual agriculturist whose income will be above that threshold level will be in the tax net. So, if in any year the income of the agriculturist is below that level, he would not get taxed in that year. Like any other businessperson, the agriculturist will get the benefit of set off and carry forward of losses, over the years, as per the provisions of the Act if he were to suffer so.
How many people will have to pay tax with such threshold levels? Presently, the threshold income of INR 2,50,000 p.a. is not of a marginal or a subsistence agriculturist. Yet let us see the relevant data. Latest estimate of rural farm household income is available from 70th round of NSS for the year 2012-13. Based on this data, the following table is being reproduced, for its direct relevance to the whole discussion.
Table: Incomes of Farm Households across different Landholding Classes 2012-13
|
Size Class of Land Possessed (Ha) |
Proportion of Total Farm Households |
Income From Farming |
Income From Livestock |
Income From Nonfarm Business |
Business Income From Wages/ Salary |
Total Annual Income |
|
0.01-0.40 |
31.86 percent (0.19) |
8232(16) |
7685(15) |
5505(11) |
28629(57) |
50193 |
|
0.41-1.00 |
34.92 per cent (0.66) |
25726(40) |
8467(13) |
5546(9) |
24135(38) |
63791 |
|
1.01-2.00 |
17.16 per cent (1.38) |
50501(56) |
11090(12) |
7113(8) |
20735(23) |
90036 |
|
2.01-4.00 |
88297(68) |
15155(12) |
6643(5) |
19882(15) |
19882(15) |
132335 |
|
4.01-10.00 |
3.72 per cent (5.66) |
182916(77) |
19112(8) |
10338(4) |
24377(10) |
234938 |
|
10.00+ |
0.39 per cent (15.25per cent) |
428224(86) |
33157(7) |
21244(4) |
15730(3) |
452299 |
|
All 100% |
100% (1.036) |
36960(47) |
10046(13) |
6212(8) |
24847(32) |
78065 |
Note: Figures in brackets in first column indicates the average landholding for particular landholding class. Figures in brackets of other columns indicate the share of income component in total income.”
Source: Ranganathan, Thiagu, 2016. Farmers’ income in India: Evidence from secondary data, p.34)
The above table presents a lot of information, all pointing to the pathetic condition of the agricultural sector in India. But, in our context, what is clear is that at the most only those households having land holding of over or around 4 hectares i.e. the last two classes would have a chance of getting covered, by the income tax net. Such households would be just around 4% of the total farm households.
How many will be taxed?
The issue can be further assessed if we estimate the number of cultivators that benefit from exemption from agricultural income. . As per Socio Economic Caste Census 2011, out of a total of 17,97,87,454 rural households, 5,41,22,794 or 30.1% households are cultivators, while 51.8% are providing manual labour (rest belong to the service sector, non-agriculture activities etc.). Assuming that the entire agricultural income of the household can be attributed to the head of the family, or one HUF, because ‘households’ as such are not a taxable entity in Income tax law, so that there is no further division of income, the figure of tax payers in our context could be 4% of 5,41,22,794 or 21,64,912. Since rural incomes have only marginally increased since 2012-13, the potential tax payer base left out due to exemption of agricultural income in 2015-16 could be optimistically at 22.5 lac. Hardly a calamitous situation!
How much revenue will accrue?
It is possible that one can turn around and say that if it is that small a population, why at all bother about it, given the socio-political costs and otherwise difficulty of implementation. After all, there are other exemptions and rebates in the IT Act 61 for other sectors or classes, as well. Sec 10 of the Act, in fact, provides more than 100 small and big exemptions besides agricultural income, ranging over a whole spectrum, from gratuity income of employees, to dividends and long term capital gains on shares to income of regulatory bodies, educational institution etc. Therefore, it is an important consideration to have some estimate of revenue foregone by this one exemption. While an accurate prediction would require a rigorous and extensive exercise, we can get an idea of the range it could be in, on the basis of broad calculations.
Tax collection as a % of GDP or GVA is a good indicator of the tax efficiency of the system. This figure, in fact, encompasses within itself a large amount of information about effective tax rates, tax enforcements and elasticities. In recent years, it has been 7 to 7.4% of the national GVA when computed without any kind of adjustment. For our purpose, since we do not tax agriculture, it is appropriate that we proceed to calculate the Direct Taxes collection ratio as a % of the national GVA of the non-agricultural sector. We can then use that fraction on the GNV of the agricultural sector for estimation of tax from that sector. We need to consider the agricultural sector not as described in the National Income Accounts but as that which gets demarcated by the definition of agricultural income in Sec 2(1A) of the Act.
In National Income Accounts the broad category for agriculture is Agriculture, Forestry and Fishing whose sub classifications are:
1. Crops
2. Livestock
3. Forestry and logging
4. Fishing and Aquaculture
Clearly, only incomes/outputs covered by S. No. 1 and 3 in the table below shall fall within the definition of agriculture income as defined by the Act. Let us call it ‘core agricultural sector’.
Therefore, to get an estimate of the revenue likely to be realised if the exemption is withdrawn, we shall compute the % of direct tax collection to National GVA minus GVA of Core Agriculture sector i.e. the part of the economy contributing income tax and then apply that ratio to GVA of Core Agriculture sector.
The results of the exercise shall be as follows:
|
|
|
2011-12 |
2012-13 |
2013-14 |
2014-15 |
2015-16 |
|
1. |
GVA : National |
8106656 |
9205315 |
10366266 |
11470415 |
12451938 |
|
2. |
GVA of Agriculture Sector |
2067935 |
2172910 |
|||
|
3. |
GVA of Core Agriculture Sector |
|||||
|
5. |
GVA National Net of Core Agriculture Sector |
7000169 |
7979679 |
8963109 |
10027376 |
10970033 |
|
6. |
Direct Tax Collection |
493987 |
558989 |
638596 |
695792 |
742295 |
|
7. |
% Direct Taxes to GVA Net of Core Agriculture Sector |
7.06 |
7.01 |
7.12 |
6.93 |
6.76 |
Source: Computed from data as available on websites of Ministry of Statistics and Programme Implementation and Income Tax Department.
Consequently, the estimate of tax collection for FY15-16 if the exemption were withdrawn or the revenue foregone on this account, would be:
INR 1481905 X 6.76 % = INR 100176.77 or approx. INR 1 lac cr
However, it would be reasonable to say that this could be the outermost limit of revenue potential from taxing agriculture income. This is likely to be truncated, mainly due to following reasons,
i) While the income threshold for taxation will be the same both across the agricultural and non- agricultural sector, there is all likelihood of incomes being in the lower end of taxable slabs, due to lower mean income of and a higher Gini mean coefficient of rural sector.
ii) In the non-agricultural scenario, a significant amount of economic activity takes place via corporates. There is no basic exemption limit for corporate taxation and such entities are taxed at flat higher rates. There is also the implicit double taxation of profits and dividends. As against that, except for plantations, most of the organisational set up here is either individual or family centric, leading to fewer realisations per assessee.
iii) There is also likely to be apportionment of income in some households in more than one hand, shifting part of the income into non-taxable or low taxable areas.
So over all we can fairly cut the ratio by about 1% and take 5.75% as the reasonable level for ratio of the tax to GNV for the core agricultural sector. If that be so, the tax revenue forgone would be about INR 85357 cr. or say 85000 cr., which is about 11% of the present base.
CONCLUSION
Therefore, to sum up, if we analyze the likely impact of tax on agricultural income keeping in view the exact provision of IT Act 61, as these exist at present, we find that we shall be taxing only a minuscule population, definitely not poor. However, we shall increase our tax resources in the region of 11%. This is not an insignificant amount.
However, whether to tax or not is a policy decision. Ultimately, it is the prerogative of the government of the day to choose policy instruments to mobilise the resources.
References
1. Socio Economic and Caste Census, 2011. Available at http://secc.gov.in
2. National Accounts Statistics, 2017. Available at http://www.mospi.gov.in
3. Ranganathan, Thiagu, 2015. Farmers' Income in India: Evidence from Secondary Data. Agricultural Situation in India. 72. 30-70. http://www.iegindia.org/ardl/Farmer_Incomes_Thiagu_Ranganathan.pdf
4. Taxmann, 2015. Income Tax Act 1961. Available at https://www.taxmann.com/income-tax-acts.aspx.
Ashwani Kumar Mehta is Chief Commissioner of Income Tax (Retd.)/Tax and Financial Consultant.
The author is an external contributor and is not an NIPFP member. The views expressed in the post are those of the author only. No responsibility for them should be attributed to NIPFP.