In today’s Finshots, we explain the history of taxing agricultural income and why it’s such a contentious issue.

The Story

Income begets taxation. Salary, capital gains, business profits, rental income and the interest on your savings bank account. You must pay a tax on this income.

But not all income is equal. And not all income is taxed. If you make money selling crops and renting agricultural land, then you may have to pay no tax at all. And if you’re wondering why that is the case, well, you have to go back in time.

Go back to the time of the British Raj. The British administration officially began taxing income in 1860 as part of a formal drive to increase revenue. It was also the first time they presented a Budget to the British crown. And lo and behold, they taxed agriculture income. Between 1860 to 1863 and 1869 to 1873, they levied a tax on farmers when their annual revenue exceeded ₹600 a year.

But after a while, they began having second thoughts.

Remember the Zamindari system we learnt about in school?

The British appointed landlords and they controlled most farmland in India. They then sublet the land to small farmers and extracted a hefty rent, a tax and even appropriated produce when they felt like it. The British lined their coffers. The Zamindars made money. But the farmers simply toiled away in these lands for next to nothing. They were landless labourers.

Now imagine levying an income tax on top of all this. It would’ve been preposterous! Maybe the British felt that way too. And even though the Indian Taxation Enquiry Committee proposed to tax agricultural income in 1925, it never happened. They said there were possible administrative and political hurdles.

Anyway, by 1935, the power to determine agriculture tax went to princely states and provinces. They had to decide what to do with this contentious subject and they didn’t do much either. Meanwhile, we claimed independence, kicked the British out and let states decide how to deal with agricultural income. And a few states did try taxing this income. The likes of Kerala, Assam, and Uttar Pradesh dabbled with this matter but eventually withdrew it claiming that it didn’t work quite as well.

In short, things never changed.

But why?

Because even back in 1961, prominent economists such as Yogender Alagh were making a case for taxing agricultural income. And agriculture contributed 50% to our GDP. It was a primary source of income and for a young nation like India, this income would have come in very handy. But back then, most people were of the opinion that farmers would struggle with taxation matters.

And they also believed collecting and monitoring payments would have incurred an even bigger cost. It didn’t seem worth the effort. There was also the fact that India had decided to impose land ceilings — meaning people couldn’t simply buy a lot of land and sit on it. They had caps on what they could own. So authorities believed that most farmers wouldn’t earn a lot of income anyway.

But times have changed. There’s an improvement in yields. Prices have shot up. And income levels have risen across the board. We have even amended land ceiling acts. Now  people and corporations own large swathes of agricultural land.

Maybe it’s time to impose that tax!

But as soon as you make this argument, someone will tell you — “You’ll hurt Indian farmers.”

And while that argument seems appealing at first, it’s not very sound when you consider everything. First of all, nobody is advocating for a tax on every farmer. Just like salaried individuals, you’ll have thresholds. And you’ll be exempt if you don’t make a lot of money anyway. In fact, this will likely be applicable to most farmers.

Over 86% of agricultural households hold less than 2 hectares of land. And while “total acreage” doesn’t equate to income directly, it’s safe to assume that struggling farmers wouldn’t end up footing a tax bill. Instead, the tax net can capture farmers whose income may add up to tens of lakhs or crores.

This sounds reasonable.

So why haven’t we implemented it yet?

Well, some states have implemented taxes to varying degrees. But to extend a blanket tax regime on all agricultural income would require extraordinary political will.

Let us explain.

When someone filed a Right to Information (RTI) application a few years ago, they found something really interesting. The land under cultivation in India remained constant. The growth in agriculture as a sector — 3–5%. But the kind of “agriculture income” people declared to tax authorities kept rising through the roof.

How’s that even possible?

Okay, imagine you’re someone who’s trying to avoid taxes. You have a plot of agricultural land and you’ve built a farmhouse. You rent it out so people could have nice parties. You make money. Now you’re not using the land for agriculture. So the income is actually subject to tax. But then, you use a small part of the land to grow vegetables or fruits. Claim that you’re indulging in some farming. And then you club all this income together and claim a tax exemption. Maybe you’ll also include income you’re receiving elsewhere. It’s a great scheme to avoid paying taxes.

It could happen, no?

We say that because when the government’s audit team, the CAG, conducted an investigation in 2019, they actually found that exemptions on agricultural income were given without even verifying supporting documents such as crop information. They didn’t even know if this income was genuine and a lot of people (including politicians who own large swathes of land) benefit from this.

So it’s always been a challenge to introduce a tax on agricultural income. Can we plug the gaps some other way? Maybe. But for now, it still seems like a distant dream.

Until then…

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PS: In yesterday’s Finshots, we wrote, “It’s tough to run an economy where we earn more than we spend. And this gap is called the fiscal deficit.”

Many of our eagle-eyed readers emailed us pointing out our error.

It should have read, “It’s tough to run an economy where we spend more than we earn. And this gap is called the fiscal deficit.” We’ve corrected this on the website and we regret the error.

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