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.
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