Taxation of Agricultural Income in India
This article explains the tax norm under agricultural income in the Indian context. Several provisions of tax law and legal precedents were used.
Agriculture is considered the livelihood of the majority of Indians. About 58% of Indians depend on agriculture as their main source of income.
Agricultural income can be defined in layman’s terms as the income derived from agricultural ventures.
Definition of agricultural income
According to Section 2 (1A) of the Income Tax Act 1961, agricultural income means:
- Rent or income comes from an agricultural land located in India: Rent is consideration for using someone else’s land. Such agricultural land must be in India.
- The case law on this point is as follows: CIT v Kamakhya Narayan Singh[i], if it has been established that arrears arrears from agricultural land cannot be considered as agricultural income.
- Another important case law on this point is – Bacha F. Guzdar versus CIT[ii]In this case, the Assessee was a shareholder in a tea company and received a dividend. He applied for an exemption because it was an agricultural income. It was found that the appraiser did not derive dividends directly from the land and therefore cannot be exempt from farm income.
- Any rents or income derived from or derived from the use of farms that make the produce suitable for the market or sale of such produce: an important case law on this point is that of CIT versus Raja Benoy Kumar Sahas Roy[iii] where the Supreme Court defined agriculture as an activity consisting of two types of operations –
- Basic operations: involves cultivating the land and then tiling it, sowing seeds, plants, etc., basically all activities that require human skill and effort.
- Subsequent operations: include those operations that are carried out for the purpose of further growth and maintenance of the plants, including weeding, digging, removing, etc.
- All income attributable to a farmhouse that is used for agricultural purposes. Such a building should be in the immediate vicinity of the property and can be a residential house or an outbuilding, etc.
Note 3 to Section 2 (1A) clarifies that all income from the sale of seedlings or saplings is to be regarded as agricultural income.
Some examples of farm income are as follows:
- Income from the sale of seeds.
- Income from the sale of newly planted trees.
- Rent for agricultural land etc. received.
Some examples of non-farm income are:
- Income from poultry farming.
- Income from beehive.
- Dividends from an organization doing business in agricultural enterprises.
- Income from dairy farming.
- Buying standing crops, etc.
Is Agricultural Income Taxable in India?
According to Section 10 (1) of the Income Tax Act of 1961, agricultural income is exempt from taxation. The central government has no power to levy taxes on agricultural income.
However, the Income Tax Act has established a method of collecting taxes indirectly on agricultural income. This method is called the partial integration of agricultural income with non-agricultural income.
Individuals, undivided Hindu families, associations of persons, groups of persons and artificial judicial persons are compulsorily required to calculate their income according to this method. Companies, limited partnerships, firms, and cooperatives are exempt from this method.
This method can be used if the following conditions are met:
- The net agricultural income is greater than Rs. 5,000 per year and
- The non-agricultural income is –
- > 2.50,000 for applicable persons (if persons under 60 years of age),
- > 3,00,000 for people between 60 and 80 years of age,
- > 5,00,000 for people over 80 years of age.
- As can be seen from the discussion above, agricultural income in India is not taxable per se. However, many economists and eminent lawyers believe that agricultural income should be taxable. Let’s look at the different views on whether or not agricultural income should be taxable.
Why should the government tax agricultural incomes?
Farm income taxation has always been a very sensitive issue and none of the governments has shown interest in corrective action, although the official reports have repeatedly raised concerns that non-farmers are abusing farmers’ exemptions.
The fact that non-farmers abuse the derogation has been officially recognized several times in the past, but little has been done to avoid it.
Agricultural income exemption was used as an instrument of tax evasion and money laundering. In 2002, the Task Force on Direct Taxation (the Kelkar Committee) stated in its 2002 report that farm income exemption distorts both horizontal and vertical justice and also encourages laundering of non-farm income as farm income.
This edition dates back to the 1970s. Economist Professor Arun Kumar says two other committees – the Raj Committee and the Wanchoo Committee – also mentioned this in their reports in the 1970s.
In 1925, the Tax Inquiry Board found that historically there was no need or theoretical justification for continued exemption from farming Income from income tax.
NITI member Aayog proposed in May 2017 that agricultural income be taxed above a certain threshold.
However, given the level of informality in the agricultural sector, it will be difficult to establish a tax system for the sector. According to the World Bank’s 2004 paper on “Taxing Agriculture in a Developing Country: A Possible Approach,” Indira Rajaraman analyzed 70 countries to show how the dual problem of cash and in-kind payments and poor accounting posed obstacles.
As we can see, farm income is more of a political issue, and where some say there should be tax plates, as with other sources of income, others say the rich farmer should be taxed. While some say the idea of agricultural income taxation is a major disadvantage for the agricultural sector, which is already in deep crisis.
[i] CIT v Kamakhya Narayan Singh (1949) 51 BOMLR 182
[ii] Bacha F. Guzdar versus CIT 1955 AIR 740
[iii] CIT versus Raja Benoy Kumar Sahas Roy 1957 AIR 768