Hindu Editorial Analysis : 5-September-2023

The issue of taxing agricultural income has sparked intense debates in India recently. To understand this debate better, let’s delve into the history of agricultural taxation, examine the significance of not taxing agricultural income, and analyze the challenges associated with this contentious issue.

History of Agricultural Taxation

1860: The Birth of Agricultural Tax

  • In 1860, India introduced an income tax that applied to all income sources, including agriculture.
  • This tax was active for five years before being repealed.

1886: Exemption for Agriculture

  • In 1886, income tax was reimposed, but this time agricultural income was exempted.
  • The reasoning behind this exemption was that agriculture was already subject to a significant tax in the form of land revenue.

The Indian Taxation Enquiry Committee, 1925

  • In 1925, the Indian Taxation Enquiry Committee attempted to bring agricultural income into the income tax framework.
  • It argued that there was no historical or theoretical justification for continuing to exempt agricultural income from taxation.

Government of India Act, 1935

  • In 1935, the Government of India Act shifted the power to impose agricultural taxes from the central government to the provincial governments.
Significance of Not Taxing Agricultural Income

Burden on the Poor

  • Small and marginal farmers have low incomes, often leaving them with little to no savings.
  • The average monthly income of a farm household in India in 2012-13 was just ₹6,491, and many farmers struggle to cover their expenses.

Limited Revenue Potential

  • Approximately 95% of agricultural assets are owned by small and marginal farmers, meaning only 5% would be liable to pay the tax.
  • The revenue generated from taxing agricultural income would be limited and may not justify the administrative burden.

Impact on Credit Access

  • Imposing agricultural tax could reduce farmers’ access to credit, favoring wealthy farmers with higher reported incomes.
  • This could further exacerbate income inequality in the agricultural sector.

Lack of Documentation

  • Many small farmers are illiterate and lack knowledge about proper land documentation procedures.
  • They often do not maintain systematic records of their production and income.

Income Fluctuations

  • Agricultural incomes are highly unpredictable due to factors like weather, diseases, and pests.
  • Taxing such volatile incomes could be burdensome for farmers.

Potential Increase in Suicides

  • Farmers already face high levels of debt and low productivity, leading to a tragically high rate of suicides.
  • Imposing agricultural tax may exacerbate this crisis.
Issues and Challenges

Stagnant Tax Base

  • Despite post-reform growth, the contribution of agricultural income to India’s GDP has declined.
  • The overall condition of farmers has improved since 1886, but challenges persist.

Laundering of Non-Agricultural Income

  • Agricultural income has been exploited as a means to convert black money into white.
  • Politicians and citizens misuse this provision, while even corporate entities engage in this evasion.

Fraudulent “Farmer” Certificates

  • Many states issue “farmer” certificates without proper scrutiny, raising doubts about their credibility.

Recommendations for Taxation

  • Numerous committees have recommended taxing agricultural income over the years, citing the need for reform.

Affecting the Vote Bank

  • Farmers constitute a significant voting bloc in India.
  • Introducing agricultural tax may impact politicians’ electoral prospects, making it a sensitive political issue.
Why In News

Recently, heated debates have surfaced regarding the contentious issue of exemptions and the non-taxation of agricultural income in India. These discussions have spurred a national conversation on the implications and potential reforms surrounding this tax policy.

MCQs about Taxing Agricultural Income in India

  1. Why is imposing an agricultural tax considered challenging?
    A. It would lead to higher income for small farmers.
    B. It may discourage small farmers from seeking credit.
    C. It is easy to maintain systematic records of agricultural income.
    D. It would have significant revenue potential.
    Correct Answer: B. It may discourage small farmers from seeking credit.
    Explanation: As mentioned in the essay, imposing an agricultural tax could reduce small farmers’ access to credit, favoring wealthy farmers with higher reported incomes. This could discourage small farmers from seeking essential financial support.
  2. What did the Indian Taxation Enquiry Committee observe about the exemption of agricultural income from income tax?
    A. There was a historical and theoretical justification for the exemption.
    B. There was no historical or theoretical justification for the exemption.
    C. Agricultural income was already taxed heavily.
    D. Exempting agricultural income was a recent policy change.
    Correct Answer: B. There was no historical or theoretical justification for the exemption.
    Explanation: The Indian Taxation Enquiry Committee, as mentioned in the essay, observed that there was no historical or theoretical justification for continuing to exempt agricultural income from income tax.
  3. What is one of the challenges associated with taxing agricultural income?
    A. A lack of credible “farmer” certificates
    B. A consistent increase in farmers’ income
    C. Easy documentation of agricultural land
    D. A reduction in the suicide rate among farmers
    Correct Answer: A. A lack of credible “farmer” certificates.
    Explanation: There is a significant lack of credibility in the way states issue “farmer” certificates. This challenge can create issues when attempting to implement agricultural taxation.

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