INTRODUCTION
There are a few popular beliefs in India that agricultural income is completely exempt from tax. While this holds somewhat true, the reality is far more complicated. The provisions regarding exemption from agricultural income under the Indian Income Tax Act have been viably and grievously abused as a loophole for tax evasion. Just among the high-net-worth individuals and companies, it also puts forward very undebatable arguments about the necessity of reforming agricultural taxation.
This blog delves into the discussion surrounding whether agricultural income is truly tax-free, the legal provisions that govern such income, and how very much these loopholes under the law are misused.
UNDERSTANDING THE LEGAL PROVISIONS
According to Section 2(1A) of the Income Tax Act, 1961, Agricultural income is:
1. Rent or revenue derived from agricultural land situated in India.
2. Income derived from agriculture, including acts of basic operations like plowing, sowing, irrigation, and harvesting.
3. Advance income from agricultural produce, still unmarketable but becoming it due to any further processing has to be exempt under section 10(1) of the Income Tax Act, provided the processing is done by the cultivator or receiver of rent.
4. Income arising out of the sale of agricultural produce by a farmer without any further process was done to it.
Under section 10(1) of the Income Tax Act, agricultural income is exempt from tax. Nevertheless, the exemption does not imply agriculturalists do not pay any tax at all, because agricultural income is utilized to determine rate under the partial integration scheme which directly affects the total tax liability of the individuals having both agricultural and non-agricultural income.
THE PARTIAL INTEGRATION SCHEME: A HIDDEN TAXATION MECHANISM
Even if they are exempt, certain individuals with both agricultural and non-agricultural incomes may end up paying higher taxes to a process known as partial integration of agricultural income with general income. In accordance with this procedure:
1. The total income becomes considered for the purpose of tax slab determination.
2. The tax is calculated on this combined income.
3. The tax is calculated again on the agricultural income-only.
4. The amount to be payable as tax is the difference.
For an example, consider a person who earns INR 6 lakh as salary and INR 5 lakh as agricultural income. The tax would be calculated piled high as though it was INR 11 lakh as a total income. So this would push the person into a higher tax slab while agricultural income by itself remains untaxed.
LOOPHOLES IN THE AGRICULTURAL INCOME EXEMPTION
In spite of the apparent goodwill behind tax-exempt agricultural income, the exemption has often been misused by wealthier individuals and firms. Here are some examples:
1. Misreporting Non-Agricultural Income as Agricultural
One of the more especially common ways of committing tax evasion is that, instead of showing non-agricultural income, it is manifested as ”agricultural income” in all its glory. These steps are then depicted as agricultural earnings, even though such profit generation from businesses is involved. This includes processing units, dairy farming, or horticulture, among others.
2. Use of Benami Landholdings
Use of ”benami” will further allow the use of corporations or HNIs (high net-worth individuals) to buy agricultural land in the name of farmers or the proverbial ”benami” or proxy farmers and channel profits through such entities.Additionally, this is not really agriculture income after all; it is merely a pretentious cover-up for non-agricultural income.
4. Companies Set Up in the Name of Agriculture
Many of these are basically shell companies established for tax purposes due to not selling any actual agricultural produce or performing very little farming activity.
5. Artificially High Sale of Agricultural Land
Landowners sometimes sell agricultural land at artificial price rates and declare such a sale as agricultural income to avoid capital gains tax. Under Section 2(14) of the Tax Code, agricultural land in rural places is not a capital asset. Hence, the gain on its sale is not taxable.
6. Large-Scale Farmers Benefiting from Exemptions
While small and marginal farmers battle with financial insecurity, wealthy landowners owning large lands have been systematically reaping the benefits of these tax exemptions. This is in sharp contradiction to the very spirit behind agricultural tax relief, which purportedly aimed to cushion low-income farmers.
THE DEBATE: SHOULD AGRICULTURAL INCOME BE TAXED?
The debate on whether agricultural income should be half paid taxes or not is fuelled by available taxes and much-maligned provisions to exempt agricultural income from most taxes.
Here are some of the views raised in favor of taxing agricultural income:
1. The combat to evasion of tax based on farming: Rest exercise-free taxation through the imposition of high agricultural incomes will therefore almost certainly stop money laundering and sly avoidance.
2. Taxation based on equity: since the rich landowners should pay their dues just like the rest of the other income group members.
3. Generation of revenue for the government: Broadening of the tax base can really help augment the coffers of the state without much burden to the salaried class.
4. Encouraging better income reporting: Farm income once it bumps above a level will lift transparency of financial reporting.
Arguments Against Taxing Agricultural Income
1. Protection of Small Farmers: Most farmers earn meager incomes and cannot bear the burden of taxation.
2. Implementation Challenges: Differentiating between genuine and fraudulent agricultural income declarations is difficult.
3. Risk to Food Security: Additional taxation may discourage farming activity, affecting food production.
POTENTIAL SOLUTIONS: STRIKING A BALANCE
- There are several ways policymakers can approach the taxation of agricultural income that does not include an overt tax on agriculture per se:
- Establish an income threshold to take action against all incomes above a certain limit, say INR 10 lakh annually; the intention here is to keep small farmers exempt.
- The taxation of individuals who are farmers versus the taxation of commercial agribusiness enterprises.
- Improving scrutiny mechanisms into agricultural income declared can help put a cap on tax evasion.
- Although the trade of agricultural land is never generally considered a taxable event, introduction of capital gains tax on the sale of agricultural land could be seen as a way of entwining such sales with the very real need to avert exploitation.
CONCLUSION
The agricultural income in India is not as tax-free as it seems to be. Though small farmers genuinely benefit from the prevailing exemptions, loopholes in the law allow high-income individuals to evade taxes. A policy reform having the proper thoughts—differentiating between small farmers and large-scale agribusinesses—could contribute to achieve tax equality without undermining the interests of farming in India. Conservative taxation policy will ensure both support to the agricultural sector and prevention of revenue loss due to tax evasion. It is about time that the policymakers reconsider and refine the para-military tax exemption framework for agriculture into a more equitable and transparent tax system.
CITATIONS
1. Income Tax Act, 1961 – Sections 2(1A), 10(1), and 2(14).
2. CIT v. Raja Benoy Kumar Sahas Roy (1957) – Supreme Court of India.
3. Mehta Parikh & Co. v. CIT (1956) – Supreme Court of India.
4. Bacha F. Guzdar v. CIT (1955) – Supreme Court of India.
5. CIT v. Kunwar Trivikram Narain Singh (1965) – Supreme Court of India.
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