We should tax agriculture. But how?

The subject of taxation on farm income has once again taken centre stage not just because there have been some distinguished opinions voiced on this subject but also that this has been recognised as one area where money is channelled to avoid paying taxes. As the focus of the Government is on black money, looking at agriculture for enhanced tax collection appears a logical corollary.

The solution is evidently not simple for were it so, it would have been implemented by now. The major challenge is really political as any such tax would be interpreted as affecting the lives of 600-odd million people and can be perceived to be a disaster during elections. Logically one can argue that if we can sift the rich from the poor this can be done. But agriculture has a complex structure.

The arguments for taxing agriculture are compelling. It is just like any other economic activity: if individuals and companies can be taxed, so should farmers, provided they go beyond the exemption limit. All other reasons put forward for not taxing farmers are more emotion-based given that the majority would be classified as socially and economically deprived. But then, this can hold for other sections too which are being taxed, especially at the lower-income level.

This said there are practical issues which have been hard to surmount so far. To begin with it must be realised that even if agriculture has to be taxed, it would be by the State as our federal structure would not permit the Centre to do so. The major problem is identifying the individuals given that many of them own small pieces of land or are landless labourers.

The numbers involved are really large, some 600 million people. The latest data on tax collections shows that of the 42 million-odd people in the organised sector around 17 million are salaried and pay taxes. In the unorganised sector which has 56 million workers, another 18 million pay taxes. Hence, the strike rate for a population of 100 million workers is just 35 per cent. In the case of agriculture with 120 million potential assessees, it will be hard to identify them.

The other issue is what can be taxed? Should it be value of output or the net income earned by farmers? While the value of output sold can be gauged and tracked to the extent that it enters the market, this is not net income as there are expenses incurred in growing crops which include seeds, fertilisers, water, and so on. Also for those owning equipment a depreciation value has to be imputed. This means farmers have to be treated on a par with companies or self-employed professionals and not income tax assessees. How can one draw up such a profit and loss account?

Further, there is a lot of produce that does not enter the market and the marketable surplus can range from anywhere between 65 to 100 per cent depending on whether it is a food crop or a commercial product such as cotton and jute. Hence, a large part of the value will be hard to fathom on this score. Also there is a lot of under-reporting given the state of logistics in the country.

There is hence an anomalous situation where there could be a considerable amount of money that is channelled here to escape tax by diverting funds to agriculture on paper or showing property owned as farmland which may be used for a penthouse. This is what needs to be plugged. To begin with this is what should be targeted by the department to weed out such leakages. This is akin to the amount siphoned out by the value-chain when it comes to food subsidy where ration shop owners sell grains in the open market and make fraudulent entries for this in their books. A way out is to tax the product which is presently also being done in some States through a mandi tax or something else. This tax will be finally passed on to the consumer who will then have to pay a higher price for the product. Such a move will ensure that the tax does not come in the way of the farmer’s income. Strictly speaking this would be an indirect tax on commodities, like an excise or sales tax, which will get subsumed under GST. The income of the farmer will still be outside the ambit of income tax.

One may have to do something out of the box here. Theoretically, in the case of large farmers thresholds for exemption can be decided for specific crops. These can be worked out on the basis of an assumed cost of production which goes into a unit of the produce which can be extrapolated to the relevant level of income which merits a tax. Using biometric impressions all sale transactions in the mandi can be recorded and aggregated leading to subsequent taxation beyond the limit. This will not be easy because of the possibility of proxy impressions; however, mandatory registration of farmers at mandis will help. However, once the National Agricultural Market attains a reasonable density, then tracking such persons with large transactions becomes easier, and tax can be imposed at source.

Taxing farm income is the practice in developed countries; it is easier given the organised nature of farming. In developing countries, however, the information systems are not satisfactory and even crop estimates are based more on satellite imaging combined with arrivals which do not give the full picture. Further, the sellers in mandis are often not the farmers as the crop moves through a labyrinth of intermediaries before entering the market. This makes identification of the farmer difficult as the intermediary would be the ‘face’, who could be paying tax even today.

This issue is definitely politically sensitive with several vested interests involved. The Government has been bold enough to operate the National Agricultural Market which breaks the traditional stronghold. The next step would be to start reforms in the direction of taxes so as to bring about greater accountability in the system while plugging the lacuna.

The writer is the chief economist at CARE Ratings. The views are personal