Sooner Or Later, Wealthy Farmers Will Have To Be Taxed

When 67 per cent of a country’s population is exempt from paying tax, the government will always be burdened with a large fiscal deficit.

That in turn will compel it to moderate the defence budget, keep allocation on healthcare below 1.5 per cent of gross domestic product (GDP), ration spending on education, and cut subsidies across sectors. That is precisely what Finance Minister Nirmala Sitharaman did in the 2022-23 Union Budget.

Roughly two-thirds of Indians are employed in agriculture. Most own small land holdings and eke out marginal livelihoods. Around 10,000 farmers die by suicide every year. Many are heavily indebted to money lenders who charge usurious interest rates.

Farm labour is equally destitute. Workers on farms own no land and depend on seasonal MNREGA work or employment at low contract wages on big farms.

But there is a third category involved in the agricultural sector: wealthy landholders who make large profits from farming. They too pay no tax. Should they?

The answer to that question has political and economic consequences. Many rich farmers have annual incomes, after deducting all expenses, that run into crores of rupees. Some of them are politically powerful.

Indeed, a few of the wealthiest 'farmers' are politicians themselves. They form a close-knit lobby which has long opposed taxing farm income on the grounds that most farmers are very poor.

They are right about that. What they don’t say, however, is that a creamy layer of over 5 per cent of those involved in the agricultural sector are rich. They can afford to pay tax.

Let’s do the math. According to the 2022-23 Union Budget, total personal tax revenue in the next fiscal is expected to be more than Rs 7 lakh crore.

This is the amount assessees from among 33 per cent of India’s taxable population contribute. The other 67 per cent – farmers – are exempt from personal income tax.

Assume now that only the top 5 per cent of those involved in agriculture have an income that puts them in the taxable bracket. There are around 150 million Indians involved in the agricultural sector. At an average of six family members per household, that translates into 900 million Indians dependent on farming.

Only 60 million assessees currently file tax returns. This would go up significantly if wealthy farmers came under the ambit of personal income tax. It could lift tax revenue substantially, possibly by a fifth over the targeted personal tax revenue of Rs 7 lakh crore, or around Rs 1.40 lakh crore a year.

The richest 5 per cent of India’s agriculturists each own dozens of acres of land and employ poor labourers to work on them. Many launder their cash income, fearing no income tax raids since they don’t have to file returns.

Low Tax-GDP Ratio

Despite total tax revenue of nearly Rs 30 lakh crore estimated to accrue to the Centre and states (including corporate tax, goods and services tax or GST and customs and excise duty) in 2022-23, India’s tax-GDP ratio will stagnate at 11 per cent. If wealthy 'farmers' contribute to the tax pie, India’s tax-GDP ratio will begin to rise. The average international tax-GDP ratio is 20 per cent. (The tax-GDP ratio in industrialised countries like France and Britain is, respectively, 24.6 per cent and 24.9 per cent. Agriculture forms a small part of total GDP in both countries.)

Politicians across parties will fiercely resist agricultural tax reform. Rich farmers and their arhityas (middlemen) in Punjab and Haryana who led the farmers’ protest against the progressive farm laws were terrified of one particular clause in the farm legislation: mandatory submission of their Permanent Account Number (PAN). That would have revealed whether or not they possessed a PAN and, if they did, the details of their bank transactions.

Wealthy land owners who have annual incomes in excess of Rs 1 crore regarded the PAN clause as the thin edge of the wedge before taxing farm income over a specific annual threshold. (It explains the ferocity of the farmers’ 13-month-long protest led by wealthy famers and their commission agents in Punjab and Haryana while landless labourers from Uttar Pradesh and Bihar worked on their large farms.)

What should the annual threshold be? A starting point could be a net income of Rs 10 lakh a year after deducting all expenses (fertilisers, tractors, power, seeds, loans, labour). This should attract a flat concessional tax rate of 10 per cent. Net incomes above Rs 20 lakh would be taxed at 20 per cent and net incomes above Rs 50 lakh at 30 per cent.

Since over 95 per cent of farmers would fall outside these income thresholds, they would remain tax-exempt.

Helping Marginalised Farmers

If additional tax revenue generated by taxing the top 5 per cent of wealthy farmers is around Rs 1.40 lakh crore a year, that would leave the government enough additional resources to direct towards health, education, infrastructure and agricultural technology.

As Ashok Gulati, one of India’s most respected voices on the agricultural sector and currently Infosys Chair professor for agriculture at ICRIER, wrote in The Indian Express on 31 January 2022: “If the Union government wants the biggest bang for its buck, the right approach is to double or even triple the amount on agri-R&D, especially in the emerging areas of high-value agriculture (horticulture, medicinal plants, livestock, fishery, etc). This is not just to raise their productivity but also build efficient value chains to supply these to lucrative markets, so that farmers’ incomes can be significantly augmented.”

Prime Minister Narendra Modi is aware of how enhancing technological solutions can improve farm productivity. Speaking last week at the golden jubilee celebrations of the International Crops Research Institute for the Semi-Arid Tropics (ICRISAT) in Hyderabad, the Prime Minister said: “To save our famers from climate challenges, our focus is on the fusion of both ‘back to basics’ and ‘march to future’. Our focus is on more than 80 per cent of small farmers of the country who need us the most. One important aspect is digital agriculture. The 2022-23 Union Budget is focused on natural farming and digital agriculture. We are working towards higher agricultural growth, inclusive growth and conserving natural resources. Digital agriculture is gaining popularity and this is something we will also have to adopt.”

Modi’s focus on agri-tech is welcome. But bolder reforms are necessary. The government was forced to backtrack on the farm laws. Will it have the courage to institute even more far-reaching reforms? It would appear not.

But taxing wealthy farmers is a bullet India will, sooner or later, have to bite.