In the history of modern India, agricultural income has been taxed by the central government under the Income-tax Act for just 13 years: from 1860 to 1873. In 1918, calls reintroduce the tax, on grounds that many assessees were declaring income from non-agricultural sources as agricultural income, were rejected by the government of the day.
Almost 100 years later, Bibek Debroy, a member of the Niti Aayog – the Centre’s policy think tank – said that agricultural income should be brought under the income tax net. “The eventual answer to expanding the tax base is to tax the rural sector, including agricultural income above a certain threshold,” he said on April 25. The Chief Economic Adviser to the Government of India Arvind Subramanian also said that states can decide to tax agricultural income, but stressed the need to make a distinction between the rich and the poor farmer. His views were echoed by
It should come as no surprise that the Niti Aayog subsequently issued a statement distancing itself from Debroy’s views and Finance Minister Arun Jaitley categorically stated that the Centre had no plan to impose any tax on agriculture income and the Opposition jumped to criticise the suggestion. The debate – or lack thereof – on the taxation of agricultural income, is a classic case of history repeating itself.
The union list of the Seventh Schedule of the Constitution enumerates matters falling within the exclusive legislative competence of the Centre, while the state list sets out subjects under the control of the states. The concurrent list consists of matters to which the legislative power of the both the union and the states extends.
What this basically means is that the union government has no executive or legislative power over items contained in the state list, and vice versa. Entry 46 of the state list gives state governments the exclusive power to tax agricultural income. This entry is a legacy of the Government of India Act 1935 and its inclusion in the state list was the subject of much debate when the Constitution for a newly independent India was being drafted.
An Expert Committee on Financial Provisions was constituted under the directions of Dr Rajendra Prasad, the President of the Constituent Assembly that was tasked with drafting the document. One of the tasks before this Committee was to examine whether the power to tax agricultural income should lie with the Centre or the states.
In its report, the Expert Committee observed that it was “obvious” that the taxation agricultural income by the states, while all other income was taxed by the Centre, stood in the way of a “theoretically sound system of income-tax in the country” and it would therefore have liked to do away with the segregation. However, it decided nonetheless to give states the the exclusive power to tax agricultural income and retain the revenue accruing thereof as that had the “political merit of keeping together in one place both benefit and responsibility”. The Committee felt that states would administer the tax with greater facility than the Centre, as they could take into account local conditions when drawing up the necessary taxing statute. “For the present, therefore, we have decided to continue the status quo” said the Committee.
Lack of courage
The Committee’s stance came under attack on the floor of the Assembly from TT Krishnamachari, the man who would go on to become Nehru’s finance minister. Krishnamachari lauded the Committee for recognising that the difference between agricultural income and non-agricultural income could not be justified, but accused Committee members of not having the courage to recommend that the distinction be done away with.
Krishnamachari felt the only way in which the revenues of the provinces could be augmented was by unifying income-tax, whether it was from agricultural or non-agricultural income, as certain states might not have the political will to tax farmers.
Shibban Lal Saxena, the Constituent Assembly member from Uttar Pradesh, echoed Krishnamachari’s concerns and felt that a standard rate of tax on agricultural income was the need of the hour. “Suppose Madras were to levy at one rate and Central Provinces at another rate. This would create great discontent” he said. He felt that for purpose of uniformity and co-ordination, this subject should be transferred to the concurrent list, so that a uniform tax rate could be set by the Centre.
Their fears have now been realised more than six decades later, with a number of states not taxing agricultural income at all, leading to a huge loss in revenue. This has also led to dissatisfaction among farmers in states like Kerala, which is the only South Indian state where agricultural income is actually taxed (a few other states have Acts to this effect but make various exemptions).
As a result, the software engineer in Bangalore who meets the income threshold pays his taxes, while the wealthy farmer whose only source of income is agricultural pays absolutely nothing.
In hindsight, one can safely say that ignoring the concerns of Krishnamachari and Saxena, and endorsing the views of the Expert Committee – thereby leaving the Union government with absolutely no power to tax agricultural income – was a mistake on the part of the Assembly.
So, what are the options before the Union government if they choose to claim the power to tax agricultural income? On paper, what it needs to do is to introduce a Bill in Parliament to amend the Constitution and ensure it is passed by a two-thirds majority in both houses. The Bill must provide for the deletion of Entry 46 from the state list that allows the state to tax agricultural income) and an amendment of Entry 82 in the union list, which prevents the Centre from doing so.
The Bill will then need to be passed in the State Legislatures of at least 15 states, and if it clears this hurdle, it will be sent to the president. Once the president gives his assent, an inevitable legal challenge will follow, most likely mounted by the non-BJP ruled states, claiming that the amendment is unconstitutional as it violates the federal principle and is against the basic structure of the Constitution.
If the government prevails before the Supreme Court, only then can it amend Section 10 of the income-tax Act, which exempts agricultural income.
The prime minister will have to expend a tremendous amount of political capital to clear these hurdles, and going by Finance Minister Jaitley’s statement, he has absolutely no intention of doing so even though economists like Debroy and Subramanian may that taxing the rich farmer is the need of the hour.
Victor Hugo, the 19th-century French romanticist, once wrote: you can resist an invading army; you cannot resist an idea whose time has come.” He clearly did not account for the political clout of the wealthy Indian farmer.
The author is the founder of Sudhir Law Review, a legal education website.
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