19th October – Taxing agricultural income

Taxing agricultural income

In a white paper on black money released in May 2012, the Central Board of Direct Taxes admitted that:

Giving credit to agricultural income for income-tax purposes without verification of claim allows an avenue for bringing black money into the financial system as agricultural income.

In 2014, the Tax Administration Reforms Commission (TARC) report ­stated emphatically:

Agricultural income is exempt from taxation in spite of large agricultural holdings … a large number of rich farmers, who earn more than salaried employees in the cities, get away with paying no tax in view of the government’s lack of will to consider an agricultural income-tax. (Report 2014: 811)

It further said,

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. A solution could be to tax large farmers. (Report 2014: 820)

In March 2016, in response to an right to information (RTI) application filed in May 2015 by an Indian Revenue Service (IRS) Officer, the Income Tax Department (ITD) revealed that agricultural income in the country rose exponentially bet­ween 2004 and 2013 and that the agricultural income earned by the 6.57 lakh assessees who had filed returns in 2011 stood at nearly Rs 2,000 lakh crore, which was over 20 times the country’s gross domestic product (GDP) of Rs 84 lakh crore in that year, even though the total area under cultivation and agricultural production had remained almost constant over the period.

It may be mentioned that of the 25 crore taxpaying households in the country, 15 crore households are designated as agriculturalists and the remaining 10 crore are non-agriculturalists, according to ­estimates produced at the conference.

Tax rules for agricultural income –

  • Agriculture is exempt from income tax under Section 2(1A) of the Income Tax Act which defines agricultural inc­ome as rent/revenue from land, income derived from this land through agriculture and income derived from buildings on that land.
  • Further, unless there is a specific taxing entry in the union or state list under the Seventh Schedule to the Constitution, no tax can be imposed by the union or the state. The tax on agricultural income is listed under the state list (entry 46), and hence the central government cannot tax such income.
  • As such, Section 10 (1) of the Income Tax Act, a Central Act, excludes agricultural income from the computation of total ­income. This exemption would, however, be available only in cases where the income in question constitutes agricultural income within the meaning of Section 2(1A). Thus, farmers who have no other sources of income are not required to file income tax returns.
  • It is only those farmers who derive income from sources other than agriculture who are required to file returns in which any ­agricultural income exceeding Rs 5,000, where the total income excluding net agricultural income that exceeds Rs 2.5 lakh in a year, is to be reported for determination of their appropriate income slab for chargeability of tax. Tax on agricultural income is then deducted from the total tax, and thus computed for the ­assessee.

Way forward –

Taxation of agricultural income by the centre would warrant an amendment to the Constitution by inserting a taxing entry in the union list with appropriate changes being made in Part XII of the Constitution, and an arrangement of assignment of such taxes to the states. This is not possible without involving the states which only can levy a tax on agricultural income at present. But there can be an alternative mechanism, a tax-rental arrangement suggested by the Tax Administrative Reforms Commission (2014) –

Against a tax free limit of Rs 5 lakh on agricultural income, farmers having a high agricultural income threshold, such as Rs 50 lakh, could be taxed. This will keep small farmers out of the purview of taxation and yet close one escape route for black money. States could pass a resolution under Article 252 of the Constitution, authorising the Centre to impose tax on agricultural income. All taxes collected by the Centre, net of collection costs, could be assigned to the states. This will broaden the taxpayer base and help ­mobilise additional revenue without affecting any but a very minuscule proportion of the very large farmers whose annual income exceeds the threshold limit. (Report 2014: 820)


QUESTION – Several reports have mentioned that agricultural income being non-taxable has become a conduit of infusion of black money in the Indian economy. Suggest how this loophole can be plugged without compromising the interest of the small farmers.

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