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Arguments against tax on agricultural income don't hold water. Here's why

Amitabh Pandey | Updated on: 14 February 2017, 3:56 IST
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The flaw

  • Direct taxation is based on equity in application
  • But agricultural income isn\'t taxed in India

The history

  • The Govt of India Act, 1935 kept agri income in Provincial List
  • Our Constitution copied those provisions in toto

More in the story

  • Why the provisions should change now
  • How taxing agri income will be beneficial to states

A fundamental principle of direct taxation is equity in application. So when your Maruti 800 is roughly pushed aside by a huge SUV full of 'agriculturists' visiting the big city to party, you do feel a twinge or three: here you are struggling to pay your advance tax and they pay no tax at all on their income from agriculture. And those incomes are huge.

A preliminary search for explanation leads to a simple answer - in the Seventh Schedule of the Constitution, taxes on agricultural income are part of the State List: only state governments can levy a tax on such incomes.

Income tax, on the other hand, is in the Union List. That, of course, excludes tax on agricultural income.

Thus, the wise will tell you that agricultural income is not really exempt. A tax can be imposed by a state government, if it wishes, under due process of law. The Central government cannot impose a tax on such income. Ta da!

Why do states not tax agri-income?

The first question that arises is why the states do not levy tax. They are perennially starved of resources and the ones with high productivity agriculture can certainly tap it to meet their revenue needs.

The answer appears obvious. The rural rich - wherever they exist - are enormously powerful, politically. They participate in local and national politics and contribute to political parties. No proposal to tax their agricultural incomes would ever see the light of day in the states.

The rural rich - wherever they exist - are enormously powerful, politically.

The Centre, if asked, would take refuge behind the Constitutional provision and wash its hands off the matter.

But again, why were such provisions made in the Constitution? Why was a tax on agricultural income not made a part of the Central list in the Seventh Schedule of the Constitution? Why did the Founding Fathers in their wisdom choose to confine tax on agricultural income to the State list instead of having a unified, equitable system of taxation of income for the nation?

Research would lead you to the Report of the Expert Committee on Financial Provisions submitted to the Secretary, Constituent Assembly of India in 1947, in which this matter was dealt with.

The Report makes for fascinating reading, but confining ourselves to the matter at hand, we must note that the Committee took as its starting point the Government of India Act, 1935 in which tax on agricultural income was placed in the Provincial list. The Committee noted as a given that:

"We have also to ensure that there is not too violent a departure from the status quo."

It recognised the need for change in the structure of the income tax but felt that political merit consisted in maintaining the status quo:

"49. It is obvious that the taxation of agricultural income by the Provinces, while all other income is taxed by the Centre, stands in the way of a theoretically sound system of income-tax in the country. We should, therefore, have liked to take this opportunity to do away with this segregation

. On the other hand, the present arrangement has the political merit of keeping together in one place both benefit and responsibility

. For the present, therefore, we have decided to continue the status quo, but, in view of the importance of the matter, would recommend that the Provinces should be consulted at once and if a majority, including of course those now levying the tax, agree, tax on agricultural income may be omitted from the Provincial List of subjects, consequential changes being made elsewhere in the Constitution."

The report of the Committee was debated in the Constituent Assembly, but the concerns were largely about the distribution of revenues between the states and the Centre. The issue of taxing agricultural income was not seriously considered. Everyone, it seems, was quite comfortable with the status quo.

We might recall here that the Government of India Act, 1935 was an Act of the British Parliament formulated by the minions of the King Emperor for the governance of a colony, viz. India.

And our Constitution incorporated in large measure the features, at least the direct tax features, of that Act and by implication the underlying logic - without much change. The stated emphasis of the expert committee was on maintaining the status quo and they did so despite their own acceptance of the need for change.

Looking back

If the compulsions of British India were somehow carried over to Independent India in the context of taxation of income, a quick look at the history books would be educative:

The British introduced the income tax in India for five years in 1860 and agricultural income was not exempt. On a permanent basis, however, income tax was imposed only in 1886 and agricultural incomes were exempt on the grounds that land revenue and cess on land were heavy and additional taxation was not justified.

This logic became inapplicable as land revenue and cess on land declined or disappeared altogether by the early years of the twentieth century. The political power of the big landowners , however, did not decline and when an "attempt was made to tax agricultural income in 1918-19 . the representatives of the landowners in the Assembly defeated this move." ('The Fiscal System' in The Cambridge Economic History of India, Volume 2)

The 1935 Act ruled that "Taxes on income other than agricultural income shall be levied and collected by the Federation" and placed taxes on agricultural income in the Provincial legislative list of the Seventh Schedule of the Act.

The Constitution of independent India replicated these provisions in toto and they continue till date. Central income tax cannot include tax on agricultural income and no state imposes such a tax on its agriculturists and it all appears just a tad unfair.

Changed situation

A poor, stagnant colonial economy just acquiring independence, with the specter of famine not very far behind in its history, can perhaps be pardoned if it prefers to maintain status quo in matters of taxation, especially taxation of agricultural income.

The logic of income tax being a disincentive to increased agricultural productivity is disingenuous, to say the least. Does a doctor work less because he has to pay income tax? Does a lawyer take fewer cases because of the tax on income?

The fear, illogical as it is, is in any case unjustified in an economy growing steadily for more than 60 years and rapidly for 30 of those 60.

But where there is strong vested interest, logic will not do and illogical fears will be used to protect privileged positions. While the Zamindars of the Bengal Presidency have disappeared into the haze of history, the new rich agriculturist of the post Green Revolution era are very much a political force to reckon with.

The political leadership needs to get beyond the pull of vested interests and do what is right

As a result, a state desperate for resources for development does not tax an obvious source of revenue and eliminate a glaring imbalance and inequity in the design of its direct tax structure at the same time.

The Constitution has been amended a hundred times .That is how it was designed - to meet the needs of desh, kaal, patra. All that is required is for the political leadership to get beyond the pull of vested interests and do what is right rather than merely what is convenient.

Ancient wisdom can perhaps be a useful guide to contemporary policy making:

".the good is one thing, the pleasant another.it is well with him who clings to the good; he who chooses the pleasant misses his end." (Katha Upanishad Trans. Max Muller 1879).

First published: 5 January 2016, 1:35 IST
 
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