Types of Agricultural Income.
- This article attempts to analyse whether tax should be levied on agriculture income in India.
- To analyse the question, first, one is required to understand the agricultural income taxation position at present.
- All over the world agriculture is not only a subject of necessity but also a subject of emotion.
- India, being an agrarian economy (in terms of employment), is highly impacted by any policy decision related to agriculture.
- Economic Survey, 2019-20 (Vol. II) defines the importance of agriculture as “Agriculture and its allied sectors remain an important sector because of its continued role in employment, income and most importantly in national food security.”
- Because of the subject’s importance and its varying nature from place to place within India, the Constitution makers have dealt with the subject delicately.·
- The Constitution of India vide Article 366(1) defines agricultural income as under:
“Agricultural Income” means agricultural income as defined for the enactments relating to Indian income-tax.
- Agriculture as a subject-specific has been placed at entry no. 14 in List-II, State List, of Seventh Schedule of the Constitution, meaning that under normal circumstances only the states, and not the center, have the right to legislate on the subject.
- The tax levying power on agricultural income has also been conferred upon states vide entry no. 46 in List-II, State List, of Seventh schedule.
- Many other provisions for various matters have also been made in the Constitution including Fundamental Rights, Directive Principles of State Policy, Panchayati Raj, etc.
Position as Per the Income-Tax Act, 1961
1. The Income Tax Act, 1961 defines agricultural income under Section 2(1A) as: -
- Any rent or revenue derived from land which is situated in India and is used for agricultural purposes;
- Any income derived from such land by—
- Agriculture; or
- The performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market; or
- The sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described as above;
- Any income derived from any building owned and occupied by the receiver of the rent or revenue of any such land, or occupied by the cultivator or the receiver of rent-in-kind, of any land with respect to which, or the produce of which, any process mentioned in above paragraphs b. and c. is carried on.
2. Agricultural income is a State subject in accordance with Entry no. 46 of List-II of Seventh Schedule (supra).
Therefore, only States can levy tax on agricultural income and thus Income-tax Act, being a Union’s Act, exempts the agricultural income from its purview through Section 10(1) of the Act.
But is agricultural income really exempt from Income-tax?
- Each year, the Finance Act defines the rates of Income Tax.
- The Government has devolved a unique method called “partial integration of agricultural income with non-agricultural income” to levy tax in cases where assessee has both agricultural and non-agricultural incomes.
- This method works in three steps which is as stated below:
(i) Agricultural income shall be clubbed with the other incomes of the assessee and tax shall be calculated on such clubbed income,
(ii) Agricultural income shall be increased with the applicable basic exemption limit and tax shall be calculated on such amount.
(iii) Tax calculated in step (i) shall be reduced by the tax calculated in step (ii) to arrive at the final tax payable.
b) It must be noted that this method applies only if assessee satisfies two conditions that are:
(i) Assessee must have both agricultural and non-agricultural incomes.
(ii) Agricultural income must exceed Rs.5,000/-.
To understand how this plus-minus game impacts the tax liability of an assessee, let us take an example*:
* For individuals not opting for Section 115BAC – newly introduced slabs.
c) We can draw the following conclusions from the above illustration:
- Even after the exclusion of agricultural income from the total income of the assessee, there might be situations when the assessee is burdened with additional tax owing to such Agricultural Income.
- When income is being taxed at maximum rate then incremental tax on agricultural income is always the same.
- In simple words, as evident from the above example, Mr. B and Mr. C had the same incremental impact on their income tax liability owing to their Agricultural Income.
d) Now the question arises that if such a method has increased the amount of tax, i.e. indirectly it has taxed the agricultural income, then is this method constitutionally valid?
Section 10(1) of the Act exempts agricultural income from its purview; therefore, the provisions of the Act are clearly in conformity to the Constitution. Then, what about the Finance Act?
- Even when the Finance Act of each year includes agricultural income, if any, to compute the Income-tax, it is only for the purpose to tax incomes other than agricultural income at higher rates.
- The formula for this purpose is so developed that it excludes tax on agricultural income only.
- In the ‘Forty-ninth Report’ of the Law Commission of India on the “Proposal for inclusion of agricultural income in the total income to determine the rate of tax under the Income Tax Act, 1961”.
- Dated on August 28, 1972, it had been established that inclusion of such agricultural income is only for determining the rate of such tax on income other than agricultural income and is valid in Law and not ultra-vires the Constitution.
- Therefore, in the light of the above discussion it can be said that even though the method as explained above does increase the amount of Income-tax payable, it is Constitutionally valid.
- Thereby it can be clearly said that a tax, though indirectly, is levied on the agriculture income in case the assessee has both agricultural and non-agricultural incomes.
Now, the question arises if agriculture income should be taxed directly?
- To analyse the question, one needs to consider many factors, starting from these two lines from the economic survey, 2019-20: “Proportion of Indian population depending directly or indirectly on agriculture for employment opportunities is more than that of any other sectors in India.”
- “The share of agriculture and allied sectors in the total GVA of the country has been continuously declining on account of relatively higher growth performance of non-agricultural sectors, a natural outcome of the development process.”
- From the above two lines, it can be deduced that agriculture, though having a limited share in India’s GDP, feeds the highest proportion of the population
- Many small and marginal farmers in the country are earning just enough to survive their livelihood.
- However, it is also true that the tax-free status of agricultural income has attracted many persons who try to route their income in such a fashion that their income appears to be the agricultural income.
- And because of such instances, many representations have been made to the Union and the State Governments suggesting the levy income tax on such cases.
- The Chartered Accountants premier institute – The Institute of Chartered Accountants of India – has time and again, in its pre-budget memorandum, submitted to the government as under:
- In its Pre-Budget Memorandum – 2018 ICAI recommended widening the scope of filing of Income-tax return as under: “A person having huge agricultural income or has large agricultural land should also come within a purview of return of income.”
- In its Pre-Budget Memorandum – 2017 ICAI recommended bringing big corporates under the tax net as under: “With the expansion of the agribusiness, many corporates are undertaking composite activities of agriculture. There is no necessity to exempt corporates concerning their agricultural income.”
- “It is suggested that income from agricultural activities carried on by corporates may be brought into the scope of the tax net.”
- Therefore, to curb the misuse of agricultural income exemption status, the ICAI and multiple other institutions have recommended bringing such income under the tax net for persons who generate high incomes under such head.
- Therefore, it can be said that the Government may consider levying tax on big agriculturists and treat them at par with other taxpayers.
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Q. What if income is partially from agriculture and partially from the business?
- Rule 7 of the Income Tax Rules, 1962 takes due care of a case where Income is partially from agriculture and partially from the business.
- In such a case, the market value of any agricultural produce which has been raised by the assessee or received by him as rent-in-kind and which has been utilised as a raw material in such business or the sale receipts.
- Of which are included in the accounts of the business shall be deducted, and no further deduction shall be made in respect of any expenditure incurred by the assessee as a cultivator or receiver of rent-in-kind.
Q- What is Market Value?
- Where agricultural produce is ordinarily sold in the market in its raw state, or after application to it of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render it fit to be taken to market.
- The value calculated according to the average price at which it has been so sold during the relevant previous year;
- Where agricultural produce is not ordinarily sold in the market in its raw state or after application to it of any process aforesaid, the aggregate of –
- the expenses of cultivation
- the land revenue or rent paid for the area in which it was grown; and
- such amount as the Assessing Officer finds, having regard to all the circumstances in each case, to represent a reasonable profit.
Q- Is there a Special Consideration for Income from Manufacturing Rubber, Coffee, and Tea (Seller in India)?
- Income from Manufacturing of Rubber – As per Rule 7A of the Income Tax Rules, 1962, 65% of the Income so received by the manufacturer is deemed to be Agricultural Income.
- Income from Manufacturing of Coffee– As per Rule 7B of the Income Tax Rules, 1962, 75% of the Income so received by the manufacturer is deemed to be Agricultural Income where coffee is only grown and cured by the seller in India.
- 60% of the Income so received by the manufacturer is deemed to be Agricultural Income where coffee is grown, cured, roasted, and grounded by the seller in India, with or without mixing chicory or other flavorings ingredients.
- Income from Manufacturing of Tea – As per Rule 8 of the Income Tax Rules, 1962, 60% of the Income so received by the manufacturer is deemed to be Agricultural Income.