Published On: Mon, May 29th, 2017

Should agricultural income be taxed?

The recent discussion on taxing farm income is nothing new. This kind of thinking was doing the rounds even in British India, when as early as 1925, a committee was set up to assess the feasibility of taxing agriculture income. The most famous attempt in post-Independence India was the K.N. Raj committee report of 1972, which also examined feasibility and implementation issues. The Kelkar task force report of 2002 estimated that 95% of the farmers were below the tax threshold. The underlying argument in the current discussion is to bring more people under the tax net to expand the tax base and also curb tax evasion because income from other sources is usually shown as agricultural income and thus evasion is easy. This, to my mind, is simplistic thinking, and similar to the argument forwarded in the case of demonetisation, which, the government said was to curb black money.

Let down by the state

If we look at the growth of agriculture in the post-reform period, the relative contribution of agricultural income to India’s gross domestic product has shrunk at an alarming rate. During the period 1991 to 2016, the share of agriculture decreased from 32% to 15%. Compared with this, the workforce dependence on agriculture is still very high, at 49.7%. Given the technological and environmental constraints, the performance of the agriculture sector has not been encouraging, and consequently, the welfare of the population living in the countryside has not visibly improved. This is the result of a deliberate policy of the Government of India to transform the economy by giving it a market orientation. As justified by the theory of economic transformation, the agriculture sector is expected to serve other sectors of the economy in terms of supplying raw material, investible surpluses and human resources. But quite deliberately, the terms of the trade are kept unfavourable to the agriculture sector. This is the standard process followed by countries around the world, and India is no exception to this rule.

Another important feature of the post-reform period that has been outlined by scholars is that the process of economic development has led to the concentration of income and wealth in a few hands, leading to the unprecedented rise of the number of billionaires in India. More than 70% of the income of billionaires comes from transfer of income — which is unearned income from other sectors of the economy. During the period of economic reforms, the gross capital formation of agriculture, which is the capacity to produce and an increase in productivity, has gone down tremendously and there is empirical evidence to substantiate this.

Diminishing incomes

Apart from this, rural social and economic services, which ought to have been provided by the government, have been found wanting. Education and health privatisation has increased the cost of rural households and the burden of all this has adversely impacted agricultural households. The average per month income of a farm household in India in 2012-13 as per the National Sample Survey Office was just Rs. 6,491. The income-expenditure gap for a majority of farmers is in the negative. More than one-third of the farmers have expressed their choice to leave the non-remunerative occupation. The agrarian distress has been deepening, and there has been a rise in farmer suicides. The agrarian sector is in deep crisis. Instead of finding a viable policy to solve the crisis, floating the idea of taxing farming income is a great disservice to the sector.