Tax agricultural income

TNN May 4, 2006, 12.00am IST

Why not?

There was a time when it did not make much sense to tax income from agriculture. That was before India's economic reforms.

India followed, along with a number of other developing countries, a policy of squeezing agriculture to transfer the sector's surplus to industry for capital formation.

This involved repressing farm prices even as industrial prices were kept high through protection. The non-farm sector bought farm produce cheap while farmers had to buy all the industrial output they bought — fertilisers, pesticide, tractors, medicines, plastic mugs, etc — at inflated prices.

Such taxation through adverse terms of trade was sufficient for agriculture in those pre-reform days. Things are different now.

Industrial tariffs have been slashed even as the prices of a variety of Indian agricultural produce have been allowed to rise to global levels and more. The terms of trade have vastly improved for agriculture.

There is little justification for according income from farming a treatment any different from that of non-farm incomes. The vast majority of farmers would fall below the tax threshold.

But there is little reason why those who supply tonnes of grain or tomatoes to the food processing industry or lettuce to restaurant chains or grapes to wineries or cane to a booming sugar industry should not pay tax on their sizeable incomes.

The issue is not just horizontal or vertical equity among taxpayers. Exemption of farm incomes from taxation becomes a conduit for largescale evasion of tax on non-farm income.

People pass off large chunks of their income as farm income and escape tax on a sizeable proportion of their income.

Removing the exemption of farm income from taxation would end this form of evasion. Of course, this would entail cooperation between the Centre and the states, with the states empowering the Centre to collect tax on farm incomes, a state subject as per the Constitution.

Such federal cooperation is not a pipe dream: it resulted in the states agreeing not to levy sales tax on textiles, sugar and tobacco in the past. All we need is a little bit of political resolve.