Agriculture is a politically sensitive subject in India. Particularly, any talk on agriculture income tax is a taboo against the backdrop of farmers’ protests, grievances and suicides. So, it was heartening to see the Chief Economic Adviser Arvind Subramanian raising the issue last month.
The federal think tank Niti Aayog Member Bibek Debroy recently presented 12 facts on agricultural income taxation. He said, “in order to widen the tax base of personal income tax, besides removing tax exemptions, rural income including agriculture income could be taxed.”
It was suggested that including agricultural income under personal income tax net will broaden the tax base and thereby pave the way to eventually reduce the overall tax rate.
These are quite bold statements as taxation of agricultural income has been strictly off-limits for any policy makers in India. As expected, Finance Minister Arun Jaitley quickly issued a denial and stated that the government has no intention to tax agricultural income. Even Niti Aayog distanced itself from the comments made by Debroy saying that those were his personal views.
Agriculture income is defined as rent or revenue from land through agriculture and from buildings on that land under Section 2(1A) of Income Tax Act. As India is primarily an agrarian economy providing employment to almost 50% of the population, the central government exempted the income generated through agricultural activities from tax liabilities under Section 10(1) of Income Tax Act of 1961 to boost the agricultural sector.
However, it needs to be mentioned that agriculture and taxation of agriculture income is a state subject. “Nothing prevents state governments from taxing agriculture income”, said Arvind Subramanian.
Agricultural Income Tax Acts exists in several states like Assam, Bengal, Bihar, Kerala, Maharashtra, Odisha and Tamil Nadu. Uttar Pradesh which introduced Agricultural Income Tax Act in 1948 repealed it within a decade in 1957 while Karnataka repealed its Act in 2016. Moreover, different states have different tax policies. Assam levies taxes on income from tea plantation at the highest slab of 45% while its neighbouring state West Bengal does not. Similarly Kerala taxes plantations but not Tamil Nadu.