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Should Farmers Pay Income Tax?

Sutanu Guru analyses the controversy over a statement that emanated from the Niti Ayog and concludes that the real issue revolves around rich Indians taking advantage of exemptions for agricultural income

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Bibek Debroy, member, Niti Ayog, has been fiercely criticised for his “personal” views on levying income tax on farmers. The following statement, though, is not attributed to him. “Does it make any sense providing support to the big farmers? Not taxing the agriculture produce of the farmers is one thing but not taxing the companies who are earning thousands of crores of rupees?”

The statement in quotes is part of a speech delivered in 2016 while the Finance Bill was being debated in Parliament. The man delivering the speech was Bhratruhari Mehtab, leader of the 20 Biju Janata Dal MPs in the Lok Sabha. Of course, there was no noise and hardly any media coverage.

Nor is it unknown that scores of economists and pundits in the past have advocated income tax for at least rich farmers. Then why this sudden hullabaloo over Debroy’s statement?

When rhetoric, posturing and ideological warfare become weapons of choice, debate is bound to descend into cacophony. Hype substitutes a sober and balanced assessment of facts. Look at the “end of civilisation” kind of hype generated over the H1B visa issue in recent times.

Earlier, demonetisation of some currency notes had led to a three-month-long frenzy. Once again, the emphasis was on rhetoric, posturing and ideological warfare rather than a sober assessment of available facts. Modi critics were gleefully forecasting Waterloo at the Assembly elections in Uttar Pradesh. The actual results have at least temporarily silenced the doomsday prophets, even though we are yet to get a clear picture of the actual costs and benefits of demonetisation. The only fact available is that the GDP growth rate in the short term has not collapsed as predicted by many.

If one looks at the brouhaha over taxing agricultural income, one would again find that facts and evidence do not merit the rhetoric. And what’s the rhetoric? Here is what senior Congress leader Ghulam Nabi Azad had to say, “The complete apathy and insensitivity of the government, which is trying to impose tax on farmers through the backdoor is exposed by the fact that while Finance Minister Arun Jaitley tried to contradict Debroy’s proposal, the CEA wholeheartedly supported taxing farmers.” For those not closely following this controversy, here is the background of the scathing indictment.

Initially, there was just a suggestion — some would even call it a trial balloon — in a note prepared by Bibek Debroy that one could at least consider an income tax on agriculture. Since there was fierce condemnation from a wide array of political parties, including the Bharatiya Janata Party, Finance Minister Arun Jaitley clarified that there was no question of levying tax on farm income. But since economists love a good debate as much as politicians do, Chief Economic Adviser, Arvind Subramanian, jumped into the fray and reasserted that one must consider levying income tax on rich farmers. Congress leader Azad was criticising this seemingly contradictory stance of senior government officials. It was, of course, hardly mentioned anywhere that the Constitution basically does not allow the Central government to levy tax on farm income. And if you think that a street-smart and populist leader like Prime Minister Narendra Modi would even think of doing such a thing, then you must be on some other planet!

What are the facts behind the debate? As per the 2011 Census, there were close to 140 million farm holdings in the country. In theory at least, if taxes were levied on farm income, there could be potentially 14 crore farmers paying income tax. But that is theory. In reality, the average size of a land holding is just about 1.15 hectares. Effectively, that means even thinking of farmers paying any “income” tax would be a cruel joke. Medium and large farm holdings (more than four hectares) would perhaps, give a better indication of “rich” farmers, who could pay income tax. They accounted for 5.25 per cent of the total or about seven million farmers who could possibly come under the tax bracket.

But look at the facts again. Farmers with large holdings, the ones who actually earn a lot, constitute just about 0.7 per cent of the total. Even if tax on farm income were applicable, just about a million farmers would have enough surplus after catering for all input costs to come under the income tax bracket. Yes, just about a million. Just about 20 million Indians pay income tax, a majority of them being salaried professionals whose tax is deducted at source. So, how would adding a million more, lead to any substantial rise in income tax collections?

So, even if Modi were to take a politically suicidal step of imposing an income tax on farmers, the results would be laughable when it comes to tax collections. So, what’s the deal? The real deal is not rich farmers, but rich Indians masquerading as farmers to avoid paying income tax. When the then Bihar chief minister Rabri Devi (whose husband Lalu Yadav has been convicted in the “fodder” scam) was questioned in the late 1990s by income tax officials about the source of her considerable income, she had allegedly claimed that her milch buffaloes fetched income in millions of rupees for her. This hilarious and apocryphal tale sums up the controversy surrounding tax on farm income. Too many rich Indians have found “farming” a lucrative way of avoiding paying taxes. Most large cities have suburbs adorned with fancy “farm houses” where movers and shakers party, negotiate and strike deals. Large sums of money is shown as income from these farm houses. For some decades, economists and tax experts have called this a blatant fraud. But action has hardly been taken on the ground.

The real debate is clear. Can and should super rich Indians, including industrialists, politicians and film stars, hide behind farm houses and farm income to avoid paying income tax? The answer is crystal clear. But like most issues in India, this one too has been obfuscated by rhetoric.