Insights into Editorial: Is NDA bringing the income of farmers under tax scrutiny?
It is being said that the recent partial demonetisation and consequent scrutiny of high value bank deposits is aimed at bringing the Indian farmer under the tax net.
- Agricultural income in India is not subject to income tax. Though the tax department has often cited the exclusion of farmers as one of the main reasons for the low tax base of 40 million, no government has ever moved towards taxing this sector given the politically sensitive nature of such a move.
Recently, the government scrapped existing Rs500 and Rs1,000 notes and asked the public to deposit these bills with banks and post offices by 30 December.
What the law says?
Agricultural income earned by a taxpayer in India is exempt under Section 10(1) of the Income Tax Act, 1961. Agricultural income is defined under section 2(1A) of the Income-tax Act.
As per section 2(1A), agricultural income generally means:
- Any rent or revenue derived from land which is situated in India and is used for agricultural purposes.
- Any income derived from such land by agriculture operations including processing of agricultural produce so as to render it fit for the market or sale of such produce.
- Any income attributable to a farm house subject to satisfaction of certain conditions specified in this regard in section 2(1A).
Why tax agriculture income?
- A large portion of Indian farmers are illiterate or semi-literate and they do not maintain systematic books of accounts regarding their production and income. Hence, assessing their true income or income-earning potential becomes an onerous task for the bank loan officers.
- So, often bank loan officers in India rely on informal networks created by social affiliations in order to elicit information about the borrowers. This provides opportunity to only those borrowers who are connected to the loan officers. Only these people obtain optimal credit.
- Besides, loan officers are rotated every three years. This makes matters worse from a borrower’s point of view. Various studies have shown that a new loan officer entering a branch after job rotation restricts credit to borrowers who borrowed from the previous loan officer.
- Also, it has been found that many farmers in India are making large cash deposits derived from non-farm sources but mask them as farm income.
How tax on agriculture helps?
- Taxing agricultural income can improve access to finance to a large section of farmers because verified income tax returns can provide a credible signal of the earnings potential of a farmer.
- Such verifiable information can help to separate conscientious and productive farmers from the unscrupulous or unproductive farmers. Such separation can be very useful in not only enabling access to finance but also entered using the cost of credit borne by farmers.
- Taxing also helps banks to carefully eliminate strategic defaulter intending to exploit the lax enforcement standards prevalent in the country.
- Well-directed agricultural loans would not only enhance agricultural productivity, but also hasten the movement of unproductive agricultural workers to the manufacturing sector.
There could be a concern that the imposition of tax could lead to credit flowing only to big farmers as they have higher income to show. However, researchers have shown that loan officers can easily infer the true income of large borrowers even when tax records do not present a true picture.
Hence, large farmers are less credit constrained. But, in case of small farmers, the loan officer cannot assess true income without carefully analysing credible evidence. Income tax return can be one such evidence.
The income tax department will soon scrutinize all high value cash deposits and cross check if it is in line with the land holdings of the farmer and the corresponding yields. In case there is a large discrepancy, the farmer will be asked to explain this difference.
Exemption of agricultural income from tax provides an opportunity to those intent on tax evasion. Unless this loophole is plugged the problem will recur. Taxing agricultural income can be done without hurting farmers who have borne the brunt of agrarian distress. Therefore, it is an idea worth pursuing.
The government should now seize the opportunity to benefit the small farmers by taxing agricultural income. If this issue is not taken care of immediately, it would lead to low agricultural productivity and high default rates on agricultural loans leading to farmer distress. The case is also for a fair tax regime and not an unfair burden on any vocation. Exemptions provide opportunities to avoid or evade taxes. Shutting down exemptions is an important part of the effort to combat tax evasion.