The Hindu Business Line : Who should tax farm incomes?

The Government's rejection of a Parliamentary Committee's recommendation to bring within the tax net the agricultural income of persons having both agricultural and non-agricultural income, is not altogether surprising. With the taxation of farm incomes clearly falling within the purview of State governments, any attempt to bring such incomes directly under the Central income-tax fold is fraught with legal challenges. A constitutional amendment to the effect does not make sense, even assuming that such a proposal would at all pass muster with the States, given their sensitivities on regional autonomy. In any case, granting the authority to tax incomes or profits accruing in a particular sector without the corresponding obligation to trigger investments or otherwise promote economic activity in that sector would be a travesty of all accepted principles of public administration.

For the Centre to take over the complete responsibility for the development of agriculture in the States is unthinkable. And it would be a folly to believe that regional parties and State-level politicians would willingly submit themselves to the vicissitudes of a Central policy over a subject that sustains a vast majority of the local population. The best that can be done under the present dispensation is for the Centre to take note of the quantum of agricultural income earned by an individual and subject his residual income to a higher rate of taxes. Such an arrangement is already part of the current income-tax code. But, unfortunately, given the consolidation of income-tax rates to just three and the fact that incomes slabs have also been widened has meant that the above provision has lost of much its earlier potency.

It is one thing to say that the Centre need not get involved in taxing agricultural incomes under the prevailing Constitutional arrangement but quite another to endorse the present laissez faire approach to agricultural incomes adopted by the States. They collect next to nothing from such levies, as is evident from the fact that such collections, according to Budget estimates for 2005-06, formed a mere Rs 82 crore against Rs 2,15,000 crores raised by the States themselves as tax revenues. No doubt, farming for a vast majority of those engaged in it, is far from remunerative, providing nothing more than bare subsistence. The situation is compounded by the fact that farm holdings over the years have been shrinking, further eroding whatever viability exists for tax purposes. Having said that, it does strain one's credibility to accept that an activity generating nearly Rs 6 lakh crore in net output, should contribute so paltry a sum as the amount currently being collected by way of agricultural income-tax. The issue needs to be looked at not as one of jurisdiction but one of sincere enforcement.

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