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How India lost Rs 50,000 crore in taxes

Last updated on: April 16, 2016 19:40 IST

Agricultural incomes can be taxed without hurting farmers, as a substantial section — the small and marginal ones — will remain outside the tax net simply because their incomes are likely to be below the basic exemption limit of Rs 250,000 per annum that is extended to all taxpayers in India, finds out Ishan Bakshi.

Politically, it is difficult terrain, but the revenue gained by taxing agricultural income could provide a significant boost to the finances of the states. (Agriculture is a subject on which the state legislates; hence taxation of agricultural income falls within the ambit of the states).

In 2007-08 alone, taxing agricultural income on a par with other incomes would have yielded revenue of around Rs 50,000 crore, according to Kavita Rao and D P Sengupta, economists at the National Institute of Public Finance and Policy. To put this figure in perspective, this amount, which was equivalent to 1.2 per cent of the country’s gross domestic product, would have boosted state revenues by roughly 19 per cent.

Farmers are a huge vote bank. Bowing to this political compulsion, governments don’t dare touch this contentious subject for fear of being seen as anti-farmer. Instances of farmer suicides only weaken their resolve. But there are reasonable arguments to be made for taxing agricultural income.

For one, agricultural incomes can be taxed without hurting farmers who have borne the brunt of agrarian distress. This is because even if agricultural income is subject to income tax, a substantial section of the farmers - the small and marginal ones - will remain outside the tax net simply because their incomes are likely to be below the basic exemption limit of Rs 250,000 per annum that is extended to all taxpayers in India.

Widening the net

But just how many large farmers could potentially be brought under the tax net? Data from the India Human Development survey 2011-12, which is jointly carried out by the National Council of Applied Economic Research and the University of Maryland, shows that roughly 10.5 per cent of households own land in excess of 5 hectares.

Of these households, roughly a third own a motorcycle or a scooter, 7 per cent own a washing machine, while another 6 per cent own a car. The logic of exempting them from taxes is difficult to rationalise. Bringing these households into the tax ambit would help significantly to widen the tax base.

Two, under the current system, even companies investing in the agricultural sector are exempt from paying taxes. In their study, Rao and Sengupta had estimated that over 50 companies reported agricultural incomes of over Rs 100 crore (Rs 1 billion) in 2009-10, with their total agricultural income amounting to Rs 31,313 crore (Rs 313.13 billion).

This figure, while significant, may well be an underestimate. As many companies are likely to have integrated operations, their actual agricultural income may either be undisclosed or underestimated. For example, any company that produces cotton and uses it to produce yarn or fabric, is not likely to report the same as income from cotton. Thus by taxing agriculture, the corporate sector that has been heavily investing in agriculture would also be brought under the tax ambit, significantly boosting state revenues.

Three, as tax exemptions to the sector provide an easy avenue for evading and avoiding taxes, taxing agricultural incomes would plug this loophole. The scope through this route is immense. According to news reports, the total amount of agricultural income declared by taxpayers in returns filed up to November for exemption in the assessment year 2014-15 stood at a staggering Rs 9,338 crore (Rs 93.38 billion).

As many have speculated, it is possible that many of these individuals have used this route to mask some of their income accruing from other sources. Perhaps that is why Finance Minister Arun Jaitley is reported to have said that tax officials are investigating people who may have tried to evade income tax by misusing the tax exempt status of agricultural income.

But the problem is likely to persist unless this loophole is plugged. People will continue to take advantage of the system to pay no taxes unless they are taxed.

Four, the same logic of exempting agricultural income has been extended to income from transfer of land. This deprives the state of a lucrative revenue stream from land sales. According to a circular issued by the department of land resources in the Union ministry of rural development, there is no tax liability on the transfer of agricultural rural lands.

Urban agricultural land is also exempt from taxation if the land was used for agricultural purposes during two years immediately preceding the date of transfer. Thus under the current system, despite a sharp increase in land prices where even single land deals can turn individuals crorepatis overnight, the state cannot levy taxes on them.

Crorepatis in the making

Consider this: in 2014-15, the National Highway Authority of India (NHAI) is reported to have acquired 6,733 hectares of land at an average compensation of Rs 1.35 crore per hectares; thus, NHAI alone would have ended up creating up to 6,733 crorepatis (the actual number of crorepatis is likely to be lower as some farmers and other landowners may have sold more than 1 hectare). In 2015-16 NHAI had planned to acquire 10,000 hectares.

And this is just one arm of the government. The total land acquired across the country is likely to have been of a much higher magnitude. Land transfers alone would have created thousands of crorepatis overnight. Yet, most of them would not have been taxed.

If all these transactions were brought under the tax net, the number of crorepati households in the country would have shot up sharply, as opposed to the mere 10,000 increase from 53,017 in 2013 to 63,589 in 2014, according to Kotak Institutional Equities.

The case for taxing agricultural incomes, as economists point out, is based on the principle of fairness. Individuals earning above a particular threshold should be taxed, irrespective of their source of income. If fact, various committees, such as the one on agriculture taxation headed by K N Raj in 1975 and more recently the Parthasarathi Shome-led Tax Administration Reform Commission, have recommended taxing large farmers.

By bringing the sector within the tax ambit, not only will the tax base be widened, but the route used by individuals to evade taxes would also be closed.

To tax or not to tax

  • Under the current system, even companies investing in the agricultural sector are exempt from taxes
  • In 2014-15, the National Highway Authority of India acquired 6,733 hectares of land at Rs 1.35 crore per hectare, creating upto that many crorepatis
  • If land transfers are brought under the tax net, the number of crorepatis in India would shoot up significantly
  • Bringing such incomes under the ambit of taxes would also close routes used by individuals to evade taxes

Photographs: PTI

Ishan Bakshi
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