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Agriculture income: Should it be taxed?


Friends, can some one answer me that which is that group or class of people in India, who earn income but are not liable to pay any income tax? Yes, it’s the people belonging to the agricultural sector. My second question is that, whether not taxing the agricultural sector is right or not? Till now, I will discuss the topic “Agriculture income: Should it be taxed”

Agriculture income: Should it be taxed

At present agricultural income is exempt under the Income Tax Act. This is because the Constitution gives exclusive power to make laws in respect of taxes levied on agricultural income ton the State legislative. As you all know, India being a developing country has maximum number of people engaged into agricultural activity. So, none of the political party has taken any step towards taxing the income from agricultural sector just in the fear of losing of the vote banks.

The reason given by all political leaders of our country for not taxing the agricultural income is that the agricultural sector is already in a bad shape, with a large number of farmers leaving this sector, mainly on account of lower prices offered to them by traders and middlemen and also on account of unreliable weather. Farmers have to struggle a lot to make their ends meet, failure to which have led a high number of farmers to suicide in the last decade. And the government does not want to curse them by taxing their insignificant agricultural income.

But in the real world, the picture shown by these politicians is not true. Taxing the agricultural income will not be a bane at all. Rather, a large number of farmers in India are immensely rich. This is evident from the sales of 1500 luxurious cars like Mercedes, BMW and Audi in the last financial year in the state of Punjab, which is basically an agriculturally driven state. When the hardworking business class or salaried citizens of India feel depressed when they find that the farmers who earn hefty amounts, are not liable to pay income tax and hence are able to afford luxurious cars like Mercedes and BMW.

Moreover, India being a developing country where a large amount of expenditure is required to be incurred in order to have proper development of infrastructure, I strongly feel that the income from agriculture should be taxed. Hence,Government feels that if they impose tax on the farmers, there will be an increase in the number of suicides committed by these farmers.

Considering the issue of suicides in the agricultural sector, the government should analyse the reasons behind these deaths and should bring positive ideas to curb these deaths. But on the other hand, taxing the agricultural income should not be overlooked, keeping in view of the increased requirement of funds to meet fiscal deficit and for infrastructural development of India.

The point raised in opposition of taxing this income that it will deplete the funds and resources of poor farmers is totally baseless because those farmers whose income is below Rs. 250,000 (as amended in the recent budget) don’t have to pay income tax. Hence, levying income tax on agricultural income will only imply taxing the income of big and rich farmers. Moreover, the tax on the agricultural income will be taxed based on the land holding pattern. And as there will be land holding on different members of the family, the limit for enjoying tax exemption increases substantially.

For Example, If a particular agricultural family has 3 persons in the family and the land is equally distributed on their name, then the income from cultivating on that particular land would be exempt up to a limit of Rs. 750,000 (i.e. Rs. 250,000 of 3 persons each). This is not possible to a family of 3 persons living in the city where the head of the family owns a business and earns an income. For such a non-agricultural family, the limit for exemption from income tax would be of Rs. 250,000 only instead of Rs. 750,000.

Moreover, if income tax is levied on agricultural income and if a farmer is liable to pay the income tax, then he will make investment by way of contribution to the Public Provident Fund or to a Life Insurance Policy within the framework of section 80C of the Income-tax Act. Because of this, the farmers would have a double benefit, namely, the first benefit of having deductions, in turn paying of lesser income tax and secondly, a habit of saving will be inculcated in the farmers of India which will lead to a bright future for them as well as for India, as a whole.

Almost, all the agencies and commissions set up in India in last 65 years have unanimously been of the view that the income from agriculture should be taxed. Dr. K N Raj, an eminent economist of India, who served as an advisor to several prime ministers like Pt. Jawaharlal Nehru and P.V. Narasimha Rao, headed a committee on Agricultural Taxation in the year 1975, which had also recommended of taxing the agricultural income of the rich farmers. Similarly, Dr. Ambedkar was of the view of taxing agricultural income with his sound reasoning. He was of the view that tax should be levied on tax paying capacity or income of the tax payer and that rich must be taxed more and poor less.

Because, Later on the Taxation Enquiry Commission which was set up in the year 1953-54 also recommended the revision of tax laws taking into consideration the changes in the prices of agricultural produce. But, unfortunately none of the political parties have given more importance to the benefit of the nation rather than their vote banks. Hence, agricultural income is still exempted from income tax till date.

Though, the fact is that the agriculture income is indirectly charged to income tax. We will discuss that in detail, but before that, one needs to understand what all constitutes the term agricultural income.

As per the Income Tax Act, any income from the below mentioned three sources of income is covered under the term agricultural income:-

  1. Any rent received from land which is used for agricultural purpose.
  2. Any other income derived from such land by agricultural operations including processing of agricultural produce, raised or received as rent in kind so as to render it fit for the market, or sale of such produce.
  3. Income attributable to a farm house, subject to some conditions as per the Income Tax Act.

In order to consider an income as agricultural income certain points have to be sufficed:-

(i)  There must me a land.

(ii)  The land is being used for agricultural operations: -This means that efforts should have been made in order to grow the crops on that land.

(iii) Land cultivation is must: – Some sort of cultivation is necessary for land to have been used for agricultural purposes.

(iv) If any rent is being received from the land then in order to assess that rental income as agricultural income there must be agricultural activities on the land.

(v) In order to assess income of farm house as agricultural income the farm house building must be situated on the land itself only and is used as a store house/dwelling house.

(vi)Ownership of the land by the farmer/cultivator is not essential.

Now, let us discuss how the agriculture income is taxed indirectly in the current scenario. For calculating the total income, the integration of agricultural income has to be done. Clubbing of agricultural income with non agricultural income for the purpose of computation of tax liability is known as integration of agricultural income. Such integration of agricultural income is required to be done if the agricultural income exceeds Rs. 5000 in the previous year or the non agricultural income exceeds the basic exemption limit (as the case maybe) in the previous year. And then the following steps are to be followed in order to calculate the tax liability.

Steps for Calculation of tax liability

Step – 1 – Add Agricultural income with non agricultural income.

Step – 2 – Calculate tax liability on income as computed in Step -1.

Step – 3 – Add agricultural income earned during previous year to the basic exemption limit.

Step – 4 – Calculate tax liability on the amount commuted under Step -3.

Step – 5 – Deduct amount of tax computed under step -4 from the tax computed under Step -2.

Step – 6 – Add education cess and secondary and higher education cess. In total-3%.

Step – 7 Total amount of Step -5 and Step -6 is the total tax liability.

For Example – For the previous year 2017-18, Mr. X, an individual has agricultural income of Rs. 2,00,000. Salary income of Rs. 6,00,000. Age of Mr. X is 45 years.

Total income = Agricultural income + Non agricultural income

= Rs. 2,00,000 + Rs. 6,00,000 = Rs. 8,00,000

Tax on total income =  Rs. 90,000

Agricultural income + Basic exemption limit = Rs. 4,00,000

Tax on this amount = Rs. 20,000.

Hence, tax liability = Rs. 90,000- Rs. 20,000 = Rs. 70,000+3% = Rs. 72,100.

If, tax is calculated only on the non agricultural income of Rs. 6,00,000, tax liability would be Rs. 50,000 instead of Rs. 70,000 as calculated above. This shows that the agricultural income is indirectly taxed.

Besides,I believe that the government should not make the citizens of the country a fool by notifying that agricultural income is exempt, because in real life, the same is not true. Rather, I am of the opinion that the government should start amend the tax laws and start taxing the agricultural income, directly. This would significantly increase the funds available with the government, which will ultimately lead to better development of the nation, as a whole.

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