Don’t miss the latest developments in business and finance.

An idea before its time

Instead of farm income tax, prune subsidies

Image
Business Standard Editorial Comment
Last Updated : May 02 2017 | 10:45 PM IST
It has long been argued that to widen the group of taxpayers, agricultural income should be brought into the tax net. Recently, a minor controversy erupted when at the time of the release of NITI Aayog’s three-year action plan, one of its members, Bibek Debroy, mentioned that this would be a wise course. Mr Debroy’s suggestion met with some swift disagreement, including from Finance Minister Arun Jaitley, who said there was no plan at the moment to tax agricultural income. Even the vice-chairman of the NITI Aayog, Arvind Panagariya, said that given the plan to double farmers’ income, taxation of that income was ruled out. Mr Debroy’s point though is well taken. If a stated aim of the government is to widen the tax net, then an obvious way to take that agenda forward is to minimise and withdraw exemptions and exceptions. As such, rural income should also be taxed, as also “agricultural income above a certain threshold”, as Mr Debroy argued. But it is also true that doing so conflicts with the other aims of the government, as Mr Panagariya pointed out. And, of course, it is politically a very difficult course.
 
But it is important also to note that the fiscal benefit of an expansion of taxation to farm income would be low; the number of farmers brought into the tax net thereby would be a very small proportion. This is because the increasing fragmentation of farm holdings in India over the past decades has made agriculture increasingly unremunerative. As a consequence of this fragmentation, the average size of landholding in India is tiny. Over 86 per cent of farms in India are less than two hectares in size. For the current assessment year, income tax is only charged on incomes above Rs 2.5 lakh a year. But according to the latest available round of the National Sample Survey, a household would have to have 10 hectares or more at least to have its income cross Rs 2.35 lakh a year on average. In other words, only a minuscule minority of those reporting agricultural income would qualify to pay income tax under these circumstances.
 
If it is the fiscal burden that matters, then there are other mechanisms that should be addressed. Rather than raising taxes on farm income, the vast amount of subsidies being paid to the farm sector, through price support and other channels, should be pruned and replaced perhaps by direct income support, as is the case in many other economies. Perhaps those transfers could segue in time into an earned income tax credit system. This might induce voluntary movement into the tax system. If the specific concern is that the agricultural income tax exception is being used to evade taxes on income earned elsewhere, then the answer is more efficient enforcement. Certainly, the magnitude of that problem should be more carefully studied before intensely disruptive mechanisms like a tax on farm income can be properly considered. For instance, is it even a significant proportion of the evaded taxation? But, above all, the NITI Aayog’s focus should be on implementable structural change with regard to how the government supports the rural sector.
 

Next Story