The issue of taxing agricultural income has been a contentious one in India, where a large section of the population depends on farming for their livelihood. However, some experts have argued that imposing income tax on rich farmers could bring more equity and efficiency in the taxation system, as well as generate more revenue for the government.
One such expert is Ashima Goyal, a member of the Reserve Bank of India’s Monetary Policy Committee (MPC), who recently suggested that the government can look at taxing wealthy farmers, after having taken care of poor farmers by transferring funds into their accounts.
According to Goyal, government transfer payments to farmers act like a negative income tax, and introducing a positive income tax for affluent farmers could be considered as part of a movement to a data-rich system with low tax-rates and minimum exemptions.
She also said that growth rates depend on many factors, but in judging a government, it is also necessary to see what growth rate they inherited and what they left the country with. She added that coalition governments tend to favour policies that deliver short-run rewards for their constituents, which hurt growth in the long-run, while single-party governments can carry out measures that enable sustainable long-run growth, but they must be open to constructive criticism and feedback from different groups to avoid taking wrong decisions.
Goyal’s suggestion comes at a time when the government is preparing to present the interim Budget on February 1 in the Lok Sabha. The Budget is expected to focus on boosting economic growth, which has been hit by the Covid-19 pandemic and the subsequent lockdowns.
The taxation of agricultural income has been debated for a long time in India, with various committees and experts giving their views on the matter. The Indian Taxation Enquiry Committee (1924–25) had recommended taxing agricultural income above a threshold, stating that it was fair and equitable to do so.
However, the Constitution of India has assigned the power to tax agricultural income to the state governments, under Entry 46 of the State List. The Union government can only tax non-agricultural income, under Entry 82 of the Union List. As a result, most states have exempted agricultural income from taxation, except for some nominal taxes or cesses.
The proponents of taxing agricultural income have argued that this exemption has led to tax evasion, as many non-agricultural income earners declare their income as agricultural income to avoid paying taxes. They have also pointed out that there is a wide disparity between rich and poor farmers in India, and that taxing wealthy farmers could reduce this inequality and also provide more resources for public spending on health, education and infrastructure.
The opponents of taxing agricultural income have contended that agriculture is a risky and uncertain occupation, which depends on various factors like weather, pests and market fluctuations. They have also claimed that agriculture is already burdened with various taxes and charges like land revenue, irrigation charges, mandi fees and electricity tariffs. They have further argued that taxing agricultural income could discourage investment and innovation in the sector, which is vital for ensuring food security and rural development.
The debate on taxing agricultural income is likely to continue in the coming days, as the government faces the challenge of reviving the economy and balancing its fiscal deficit. The views of experts like Goyal could provide some insights and inputs for the policymakers to consider while framing their budget proposals.