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Why taxing agriculture is not going to help Modi government

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Low farm incomes to make prospect of higher revenues by taxing the sector difficult

There is a debate now on whether agriculture should come under the tax net. member seems to have suggested that the should be taxed like other sectors. The discussion on taxing agriculture is not a new thing and it has persisted throughout the planning period in India. The Committee on Taxation of Agricultural Wealth and Income, chaired by K N Raj, had recommended the introduction of Agricultural Holding Tax (AHT) in place of land revenue. The suggestion of was criticised by many economists. Preparation of records for the estimation of the value of various relevant variables was another difficulty. It was also felt that its administration would be too costly. This tax, so far, has not been imposed in the country.


The argument in favour of agricultural tax is that rich farmers with large operational holdings are earning large incomes. Huge agricultural subsidies are cornered by the large farmers. Agriculture has shown significant diversification. Some of the activities are similar to manufacturing, such as contract farming. Another argument is that many non-agriculturalists and those who own farm houses avoid taxation in the name of agricultural income. The number of payers are low in India. One can not widen the unless the is brought under taxation. Any way, many farmers do not come under the tax net and therefore they should not worry about agricultural taxation. State governments can get some revenue by taxing large farmers and non-agriculturalists showing agriculture as income.  


However, according to us, there are three arguments against the introduction of agriculture tax. First, the tax revenue will be very low and it is not worth considering taxation of agriculture. It may be noted that farmers’ incomes, particularly small and marginal farmers, are very low. Around 95 per cent of total holdings belong to small and medium farmers. 

Table 1. Monthly income of agricultural households: 2013

Land size (hectares) Total Income of farmers (Rs)
<0.01 4,742
0.01-0.40 4,396
0.41-1.00 5,371
1.01-2.00 7,405
2.01-4.00 10,849
4.01-10.00 19,995

>10.00

41,412
All Classes 6,653

Source: NSS Situation Assessment Survey 2013


As shown in Table 1, agricultural households with 0.01 to 2 hectares receive monthly income ranging from Rs 4,700 to Rs 7,400. In other words, their annual income is around Rs 57,000 to Rs 90,000. This is not enough even to get basic necessities like clothing, housing, education and health for a family. Farmers have to borrow to fulfill their consumption of basic things. Even if you take large farmers above 10 hectares, their monthly income is around Rs 41,000. If you convert it to per annum, it would be Rs 5 lakh for large farmers. 


Also, real income of farm households increased only by 34 per cent in the ten-year period between 2003 to 2013 as shown in Table 2. Income from cultivation rose only 32 per cent. The government is thinking of doubling farm income by 2022. It is going to be a difficult task to double farm income in six years. Even if it is doubled, farmers income will still be too low to get higher revenues from agricultural taxation.

Table 2. Ratio of real monthly income of 2013 over 2003 (%)

Wages 1.22
Cultivation 1.32
Animals 3.21
Non-farm 1.00
Total farm income 1.34

Source: Calculated from NSS reports of 2003 and 2013
 

Second, it is administratively difficult to implement. It is not likely to serve as an efficient instrument in view of the difficulty in obtaining adequate account on farm incomes and expenses and the real possibility of tax evasion by the more influential cultivators through overstatement of costs and understatement of output. There is also the possibility of harassment of the less influential and poor cultivators at the hands of petty officials. 


The third argument is that agriculture is already taxed with various regulations. Multiple regulatory hurdles which limit opportunities for farmers have to be removed. For example, sudden export bans on an agricultural commodity when international prices are high implies tax on farmers’ incomes. Frequent export bans on several commodities are well known in India. Similarly, there are restrictions on internal trade. Although, now, the government is planning a national common market. Mandi taxes are also high in several states. In other words, agriculture is already taxed in many ways with multiple restrictions. 


Due to the above arguments, taxing agriculture may not help the government in the form of revenue. Also, politically, it is not a good idea to tax agriculture. Instead, the government should concentrate on widening the in industry and services. The issue of non-agriculturists showing agriculture and farm houses of bollywood stars and industrialists should be dealt with separately and not mixed with agricultural taxation.


The writer is director and vice-chancellor, IGIDR

Why taxing agriculture is not going to help Modi government

Low farm incomes to make prospect of higher revenues by taxing the sector difficult

Low farm incomes to make prospect of higher revenues by taxing the sector difficult

There is a debate now on whether agriculture should come under the tax net. member seems to have suggested that the should be taxed like other sectors. The discussion on taxing agriculture is not a new thing and it has persisted throughout the planning period in India. The Committee on Taxation of Agricultural Wealth and Income, chaired by K N Raj, had recommended the introduction of Agricultural Holding Tax (AHT) in place of land revenue. The suggestion of was criticised by many economists. Preparation of records for the estimation of the value of various relevant variables was another difficulty. It was also felt that its administration would be too costly. This tax, so far, has not been imposed in the country.


The argument in favour of agricultural tax is that rich farmers with large operational holdings are earning large incomes. Huge agricultural subsidies are cornered by the large farmers. Agriculture has shown significant diversification. Some of the activities are similar to manufacturing, such as contract farming. Another argument is that many non-agriculturalists and those who own farm houses avoid taxation in the name of agricultural income. The number of payers are low in India. One can not widen the unless the is brought under taxation. Any way, many farmers do not come under the tax net and therefore they should not worry about agricultural taxation. State governments can get some revenue by taxing large farmers and non-agriculturalists showing agriculture as income.  


However, according to us, there are three arguments against the introduction of agriculture tax. First, the tax revenue will be very low and it is not worth considering taxation of agriculture. It may be noted that farmers’ incomes, particularly small and marginal farmers, are very low. Around 95 per cent of total holdings belong to small and medium farmers. 

Table 1. Monthly income of agricultural households: 2013

Land size (hectares) Total Income of farmers (Rs)
<0.01 4,742
0.01-0.40 4,396
0.41-1.00 5,371
1.01-2.00 7,405
2.01-4.00 10,849
4.01-10.00 19,995

>10.00

41,412
All Classes 6,653

Source: NSS Situation Assessment Survey 2013


As shown in Table 1, agricultural households with 0.01 to 2 hectares receive monthly income ranging from Rs 4,700 to Rs 7,400. In other words, their annual income is around Rs 57,000 to Rs 90,000. This is not enough even to get basic necessities like clothing, housing, education and health for a family. Farmers have to borrow to fulfill their consumption of basic things. Even if you take large farmers above 10 hectares, their monthly income is around Rs 41,000. If you convert it to per annum, it would be Rs 5 lakh for large farmers. 


Also, real income of farm households increased only by 34 per cent in the ten-year period between 2003 to 2013 as shown in Table 2. Income from cultivation rose only 32 per cent. The government is thinking of doubling farm income by 2022. It is going to be a difficult task to double farm income in six years. Even if it is doubled, farmers income will still be too low to get higher revenues from agricultural taxation.

Table 2. Ratio of real monthly income of 2013 over 2003 (%)

Wages 1.22
Cultivation 1.32
Animals 3.21
Non-farm 1.00
Total farm income 1.34

Source: Calculated from NSS reports of 2003 and 2013
 

Second, it is administratively difficult to implement. It is not likely to serve as an efficient instrument in view of the difficulty in obtaining adequate account on farm incomes and expenses and the real possibility of tax evasion by the more influential cultivators through overstatement of costs and understatement of output. There is also the possibility of harassment of the less influential and poor cultivators at the hands of petty officials. 


The third argument is that agriculture is already taxed with various regulations. Multiple regulatory hurdles which limit opportunities for farmers have to be removed. For example, sudden export bans on an agricultural commodity when international prices are high implies tax on farmers’ incomes. Frequent export bans on several commodities are well known in India. Similarly, there are restrictions on internal trade. Although, now, the government is planning a national common market. Mandi taxes are also high in several states. In other words, agriculture is already taxed in many ways with multiple restrictions. 


Due to the above arguments, taxing agriculture may not help the government in the form of revenue. Also, politically, it is not a good idea to tax agriculture. Instead, the government should concentrate on widening the in industry and services. The issue of non-agriculturists showing agriculture and farm houses of bollywood stars and industrialists should be dealt with separately and not mixed with agricultural taxation.


The writer is director and vice-chancellor, IGIDR


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S Mahendra Dev

Business Standard

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