Income generated from agricultural advances by state cooperative banks and district central cooperative banks is likely to be exempted from tax from 2008-09. The finance ministry is considering a proposal to this effect in order to boost farm sector financing.

The finance ministry is also considering measures for consolidation of fragmented land holdings for accelerating agricultural growth. As a consequence, companies are likely to be allowed to invest in contract farming activity in a big way.

The agriculture sector is expected to get top priority in Budget 2008-09. The government is aiming to achieve farm sector growth of 4 per cent, up from the projected 2.6 per cent in 2007-08.

Recently, Finance Minister P Chidambaram had said that the first charge of "our resources" is for agriculture.

Cooperative banks, exempted from paying income tax since 1970, were brought under income tax net from 2006-07.

In effect, the move led to them being treated at par with scheduled commercial banks. However, Primary Agricultural Credit Societies and Primary Agricultural Rural Development Banks continue to enjoy tax exemption as they are mainly financing agricultural and allied activities.

"State cooperative banks and district central cooperative banks are also financing agricultural and allied activities by way of refinance as well as direct lending to cooperative sugar mills and spinning mills," a source said.

Taxing income of the cooperative banks have hit their efforts to provide more financial assistance for agricultural activities due to shortage of own funds.

The Department of Financial Services has forwarded a proposal to the higher authorities in the finance ministry, to extend the tax benefits to the state and district cooperative banks also.

Meanwhile, a top implementing agency for agricultural financing policies has recommended that the government should facilitate consolidation of land holdings for corporatisation of farmings to boost the sector.

It has suggested that land consolidation be assigned to the block development offices while the corporations can take it from the government for farming. The farmer would get a consideration by way of rental fee.

As a precaution, it has also recommended that the definition of land use should be tightened so as to avoid misuse of the land.