Introduction
“In the matter of taxation, every privilege is an injustice”
-Voltaire
The debate of taxing agricultural income is not new. It was reignited by the 2019 Comptroller and Auditor General Report where the reported put forth the rising negative aspects of exemption of agricultural income. It reports that the exemption has facilitated tax evasion and therefore, black money laundering. The report also claimed a net evasion of INR 5 Bn in the FY 2017-18.
Many political personalities have also been said to use this as a safe haven. In any case, this is not the first time such an irregularity has been brought out. Many earlier Committees viz., the KN Raj Committee, Kelkar Committee, etc. have put emphasis on the matter of taxing agricultural income. There are other problems associated with the exemption. The administrative issues uphold the unconstitutionality of Centre’s action where the States have prerogative in this regard. Political issues illuminate the most dangerous downside of removing the exemption, i.e., public unrest and rising poverty. There are a few facts on the basis of which these committees advocate the removal of tax exemption on agricultural income in India. One of the propositions is that India has now become a self-sufficient agricultural economy which has seen tremendous growth in production as well as the living standards of those involved in the sector.
The exemption on Agricultural income has been provided under Sec 10(1) of the Income-tax Act, 1961. It puts almost a blanket exemption on such income.
In this article, the author has sought to produce the meaning and the scheme of taxation of Agricultural income in India. The attempt has also been made to examine the justifications i.e., political and administrative of such an exemption even after 75 years of independence of the nation.
Agricultural Income: The Definition
Agricultural Income has been defined under Sec 2 (1A) of the Income-tax Act, 1961. For the purpose of understanding, Agricultural Income has been divided under three heads:
- (i) Rent or Revenue
Sec 2(1A) (a) of the Act defines this head of classification as:
“Sec 2 (1A) (a): any rent or revenue derived from land which is situated in India and is used for agricultural purposes;”
The primary condition for the income to be claimed as “agricultural income” under Sec 2 of the Act is the land shall be used for “agricultural purposes”. The principles to determine “Agriculture” and “agriculture purposes” was defined in the case of CIT v. Raja Benoy Kumar Roy[1]. The Court was of the opinion that to constitute agricultural income, some “Basic” and “Subsequent” operations are to undertaken. It is not important for the activities to be associated with humans or cattle. Furthermore, it is not necessary that every activity related to the land would constitute agricultural income. In CAIT v. New Ambadi Estates Ltd.[2], it was held that when the two operations are undertaken by two different people, it does not constitute agricultural income.
- (ii) Income derived from agricultural land
In some types of harvest, it is important for the produce to undergo some sort of processing for the purpose of sale. Therefore, the income incurred from the processing of the produce to make the product ready for sale also constitutes agriculture income, subject to the requirements of Sec 2(1A) (a) of the Act. Sec 2(1A) (a) of the Act is as follows:
“Sec 2 (1A)(b) any income derived from such land by- (i) agriculture; or (ii) the performance by a cultivator or receiver of rent- in- kind of any process ordinarily employed by a cultivator or receiver of rent- in- kind to render the produce raised or received by him fit to be taken to market; or (iii) the sale by a cultivator or receiver of rent- in- kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in paragraph (ii) of this sub- clause”
In Brihan Maharashtra Sugar Syndicate Ltd v. CIT[3]and CIT v. Stanes Amalgamated Estates Ltd[4] here the produce is not necessarily required to be processed before putting it on the market, the income arising from additional processing does not constitute agricultural income.
- (iii) Income from the farm building
A house property is taxable under Sec 22 of the Act. If a house property satisfies the conditions of Sec 2(1A) (c) of the Act, then it is considered agricultural income, and therefore, is exempted from the tax under the Act.
“Sec 2 (1A) (c): any income derived from any building owned and occupied by the receiver of the rent or revenue of any such land, or occupied by the cultivator or the receiver of rent-in-kind, of any land with respect to which, or the produce of which, any process mentioned in paragraphs (ii) and (iii) of sub-clause (b) is carried on”
The said property should be in the vicinity of agricultural land. The use of the land shall be connected to either the agriculture produces or as dwelling for the it to constitute an agricultural income exempt from tax. The exemption is granted only if the property is used for agriculture process. Ownership of the property is also not a necessary condition.
Taxability of Agricultural Income
- Exemption
Sec 10 (1) of the Income-tax Act, 1961 excludes agricultural income as provided in Sec 2 of the Act from the purview of total income under the Act. It is provided as:
“10. Incomes not included in total income: In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included— (1) agricultural income”
- Indirect levy
The sale of the land
Earlier, the proceeds from sale or transfer of agricultural property constituted agricultural income under Sec 2 of the Act and therefore, was not considered to constitute total income. It was also backed by judicial precedents. The agricultural land did not come under the purview of “capital assets” and thus, the sale proceeds didn’t get taxed under the Act.
In 1970, the Parliament passed the Taxation Laws (Amendment) Act, 1970.This amendment changed the definition of “capital assets”. By virtue of this amendment, the agricultural land situated in urban area was retrospectively put under the ambit of “capital gains”.
Sec 54(B). “Capital gain on transfer of land used for agricultural purposes not to be charged in certain cases”:
Conditions 1. The claimant shall be an “individual or his parent, or a Hindu undivided family”.
Conditions 2. The aforementioned asset shall “in the two years immediately preceding the date on which the transfer took place, was being used” by the “individual or his parent, or a Hindu undivided family”.
Conditions 3. “the assessee has, within a period of two years after that date, purchased any other land for being used for agricultural purposes”
Conditions 4. The amount which constituted the proceeds of the sale of the agricultural land shall be used in whole for the subsequent purchase of another agricultural land. According to Sec 54B(i), if the “capital gain is greater than the cost of the new asset”, total difference shall be taxed under Sec 45. According to Sec 54B(ii), if the “capital gain is equal to or less than the cost of new asset, the capital gain shall not be taxed under Sec 45”.
Conditions 5. The subsequently bought property shall not be sold or transferred in three years from such purchase. In case the land is sold within the said period, the value of the land shall be reduced by the amount of capital gain claimed by the assessee under the Section.
Conditions 6. If in case the assessee is unable to purchase another agricultural land with the sale proceeds, he shall deposit the amount in Capital Gains Account Scheme.
The Finance Act, 2014: Partial Integration
By the way of an Amendment in 2014, an indirect levy was brought in the purview of agricultural income, called “Partial Integration of Taxes”. The “partial integration of non-agricultural income with agricultural income” has been elucidated in the following three conditions:
1. The assessee is “an individual, an HUF, a body of individuals, an association or an artificial juridical person”.
2. The taxpayer has income not coming under the purview of “agricultural income” which exceeds the amount exempted.
3. The agricultural income of the assessee is more than INR 5,000.
When the aforementioned conditions are satisfied, the scheme of partial integration is available. The exemption limit for the assessment year 2021-22 is INR 2,50,000. The higher exemption limit:
(a) INR 3,00,000: For super senior citizens, (resident) born- on or after April 2, 1941, but on or before April 1, 1961 and for individuals opting for alternative tax regime under Sec 115BAC of the Act.
(b) INR 5,00,000: For the super senior citizen (resident) born- on or before April 1, 1941.
Rules for Part Agricultural and Part Business
Taxation of composite businesses, i.e., part agriculture and part business are dealt in the following rules:
Rule 7: Deals with cultivation and manufacturing of tea in India.
Rule 7A: Deals with latex, cenex, latex based crepes, brown crepes, etc.
Rule 7B: Deals with cultivation and cure of coffee.
Rule 8: Deals with coffee cultivated, cured, roasted and grounded by seller in India (with or without flavouring agents).
In these cases, the “market value” of the agricultural produce incurred to the assessee whether in cash or kind further, utilised as a raw material in his business, is deducted. A further reduction is impermissible.
Justification for exemption
Agricultural Income in India has only been taxed twice viz., 1860-65 and 1969-73. The relevant report for the justification of such perpetual exemption is the Indian Taxation Enquiry Committee, 1925. The observations of the committee are as follows:
“There is no historical or theoretical justification for the continued exemption from the income-tax of income derived from agriculture. There are, however, administrative and political objections to the removal of the exemption at the present time. There is ample justification, for the proposal that incomes from agriculture should be taken into account for the purpose of determining the rate at which the tax on the other income of the same person should be assessed, if it should prove administratively feasible and practically worthwhile.”
This stand of the government was cemented in the Government of India Act, 1935. In the Act, “provincial levy” was imposed on agricultural income. The delegation of authority to tax agricultural income was, thus, carried-forward even in the Constitution of India.
- Relevant Constitutional Provisions
Union List: Entry 82- By virtue of this entry, the Constitution empowers the Union Parliament to legislate on “taxes on income other than agricultural income”.
State List: Entry 46- By virtue of this entry, the States are entitled exclusively to legislate on “taxes on agricultural income”.
From the above discussion, we can see that there are no historical reasons due to which the agricultural income is not being put under the purview of taxation under the Act. Some credits for this could be attributed to the fact that farmers were taxed heavily on their land as well as produce in the colonial era and thereafter. For example- cess, water tax, etc. According to AK Chanda, this exemption was continued due to hight rates of land revenue. When the Indian government took hold of this nation, almost 60-70% of the population was in the unorganised primary sector of agriculture. The measure was to benefit the low-income issue group of farmers.
After 75 years of independence, we are still following the exemption. The resolution to that is not easy. Various political factors play an important role in maintaining the status quo. Furthermore, many administrative reasons can also be attributed to the reason for not shedding the exemption and taxing agricultural income under the Income-tax Act, 1961.
Administrative Objections
Even after States have been given exclusive rights to taxation, the Central Government has been bestowed with the power to define and amend the definition of “agricultural income”. This is to facilitate the centre’s control on the state’s action. The checks and balances between the two is necessary to determine and uphold the fiscal balance between the two. Though there are concrete Constitutional provisions, only a few states like Assam, Bihar, Kerala, Karnataka, etc. have implemented agricultural income taxation that too in an uneven and sporadic manner.
The following could be attributed with the responsibility of administrative objections to taxing of agricultural income:
a) Cost: It is widely believed that the financial resources involved in collecting the taxes would be disproportionate to the worth of tax collected. The recent estimates propose that only 53% of the total rural activities are related to agriculture.
b) Factors involved: For calculating the income accrued for taxation is a dicey endeavour. There are many factors which will act as hurdles to proper calculation. The family labour involved in the production would make it very difficult to bifurcate the taxing amount because of the labour cost involved. Another impediment is the lack of accounting by the illiterate farmers for their inputs. A major factor is that there is no uniformity in the agriculture production. They vary in cost of input, labour, produce, etc.
c) Definite yardstick: Taxing of the produce would be calculated for the subsequent year. The tax slabs would be difficult to define because of disproportionate and non-uniform relations between land-holdings and produce.
d) Dynamics and dividends: Another administrative objection would be with regards to the dynamic input and output prices. The income as whole might come under the purview of tax slab but the dividends may not, causing hardship for individual stakeholders.
e) Federal Scheme: The biggest problem which would arise out of taxing the agricultural income is the breach of balance of the Indian federal structure. When the Constitution has clearly provided for State’s prerogative on agricultural income, bringing it under the purview of central tax structure would be constitutionally unjustified and against the spirit of federalism.
Political objections
The political objections to the taxation of agricultural income can be traced back to the colonial era. The atrocious British regime imposed unjust taxes on the farmers. The wounds are still fresh. Any proceedings regarding taxing the agricultural sector brings the sentiments back into play.
a) A downright rejection of such laws by the rich landowner and pressure groups constitutes the political reasons behind the continued exemption.
b) The government is aware of its meagre social security provision to the rural agriculture sector. Even after the dilapidated state of the rural farmers, if the government tries to implement further taxation on their income, it would not be a very successful venture leading to social unrest.
- Indecisiveness
There have been many committees constituted for the purpose of examining the scope of agricultural income in the arena of taxation. The KN Raj Committee has submitted its report on the same issue in 1972. It recommended a graded “Agricultural Holding Tax”.[5] 2002 Kelkar Committee reported that the exemption of agricultural income jeopardises the “vertical and horizontal equity”. 2014 Tax Administration Reform Commission also emphasised that “Agricultural income of non-agriculturists is being increasingly used as a conduit to avoid tax and for laundering funds, resulting in leakage to the tune of crores in revenue annually.”[6] Even after a litany of recommendations in this regard, the government has not been able to take a concrete step in this regard for the sole reason of allegedly losing the vote banks.
- The murky river
We have seen both the left and right rulings in the country. None have dared to bring the agricultural income under the purview of taxation. Many allege that the reason behind it is the indirect profit to the politicians. It is said that exemption on agricultural income buttresses the black money rackets and has turned out to be a fool proof means to circumvent the taxes, but the truth of these allegations is questionable. We cannot attribute any single factor to be the reason of the continuation of the exemption.
Conclusion
Taxation on agricultural income is a double-edged sword. Where its implementation will increase the national revenue, it will hamper the interests of marginal farmers. If it is not brought under the purview of taxation, it will hamper the national revenue by acting as a free-pass for the elite and rich farmers. What is necessary in the present state of being is to strike a balance between the two. The tax slabs shall be decided in order to provide maximum safeguard to the vulnerable. Furthermore, only the classification will not help their cause. A holistic approach to the whole issue shall be taken. Poverty alleviation and social security are allied to the problem of blanket exemption. For the government to consider taxing agricultural income, it is necessary to first bring the stakeholders in a state of paying the tax.
[1] AIR 1957 SC 768.
[2] (1967) 63 ITR 325.
[3] (1973) 87 ITR 136 Bom.
[4] (2002) 172 CTR 166.
[5] CH Hanumantha Rao, Agricultural Taxation: Raj Committee’s Report, 7 EPW 2345, (1972).
[6] Dilip Mookherji, Tax Administration Reform and Taxpayer Compliance in India, 11 IT&PF, (2004).
Author Bio
Agriculture is a State subject. I have been paying Agriculture Income Tax to Govt of TamilNadu even during 1975. The Stat, as a welfare measure, exempted one and all from the Tax. To encroach upon State’s right is incorrect.
P.Chidambaram has made effectively the Agricultural Income to be accounted in such a way that the Tax Slab of other income goes up.
Now the provisions need a detailed report such as details of land, extent of land, location, cropping pattern etc., if your Agricultural income is above 5,000/-
Unless you wish to add to the already hard working low earning majority of farmers in the garb of catching a few cheats it will be a sad day for all small and marginal farmers who are already regaling under huge debt and vagaries of weather.
My father who was a member of Constituent Assembly of India used to say that people earn a lot from Agriculture should be given Land in lieu of Salary; if you say a person can earn 1.00 lakhs per Hectare and if his Salary is 12.00 Lakhs, give him 12 Hectares of land in lieu of Salary. If he makes more, let him keep it.. All sitting in Kushi Office think that Agriculture is a profitable venture. Personally, I sold all lands and from Deposits I earn more tha what I did from land even at this low rate offered by Banks.
Let those who talk of Taxing Agricultural income first come forward to receive Land in lieu of Salary