ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

A+| A| A-

Direct Taxes Code and Taxation of Agricultural Income

Given the pressures on government expenditure and the need to generate additional revenues without generating too many distortions, it is important to bring back to the discussion table the need to deal with taxation of agricultural incomes. The issue has been discussed at length by a number of reports on taxation as well as in the literature on tax policy in India. This paper seeks to reignite this debate at two levels: one by asking for a more comprehensive taxation of incomes, implying thereby taxation of agricultural incomes as well. The second is the need to use current legislation to ensure that the exemption base of agricultural income from taxation is kept as narrow as possible as against expanding it.

SPECIAL ARTICLE

Direct Taxes Code and Taxation of Agricultural Income

A Missed Opportunity

D P Sengupta, R Kavita Rao

Given the pressures on government expenditure and the need to generate additional revenues without generating too many distortions, it is important to bring back to the discussion table the need to deal with taxation of agricultural incomes. The issue has been discussed at length by a number of reports on taxation as well as in the literature on tax policy in India. This paper seeks to reignite this debate at two levels: one by asking for a more comprehensive taxation of incomes, implying thereby taxation of agricultural incomes as well. The second is the need to use current legislation to ensure that the exemption base of agricultural income from taxation is kept as narrow as possible as against expanding it.

D P Sengupta (dpsengupta@gmail.com) and R Kavita Rao (kavita@nipfp. org.in) are with the National Institute of Public Finance and Policy, New Delhi.

Economic & Political Weekly

EPW
april 14, 2012 vol xlvii no 15

M
ost agricultural income in India today is not subject to tax. While agriculture accounted for about 12.3% of gross domestic product (GDP) in 2009-10, its contribution to taxation is limited to the value added tax (VAT) paid on some of the products and the agricultural income tax paid on a few plantation crops like tea. The other sectors in the country usually face income tax in addition to indirect taxes such as VAT and Cenvat/service tax. A hypothetical question of how much additional revenue could have been mobilised, if agricultural incomes too were treated on par with other incomes and subject to income tax, yields an answer of a potential revenue in the range of Rs 50,000 crore for 2007-08, i e, about 1.2% of GDP or about 9% of the GDP of agriculture (see Appendix (p 59) for some computations). While additional revenues of this size would not substantially alter the profile of overall government receipts in India, it represents a sizeable amount of revenue for states, adding about 19% to the revenues of the states.

Apart from revenue considerations, it is commonly accepted that exemptions generate incentives to under-report taxable incomes, thereby undermining the revenues from taxable sources as well. The Report of the Taskforce on Direct Taxes (Kelkar Committee), for instance, discusses the under-reporting of incomes under the guise of exempt agricultural income.

Given the pressures on government expenditures and the need to generate additional revenues without generating too many distortions, it is important to bring back to the discussion table the need to deal with taxation of agricultural incomes. These issues have been discussed at length by a number of reports on taxation in India as well as in the literature on tax policy in India. This paper seeks to reignite this debate at two levels: one, by reiterating the more established argument, asking for more comprehensive taxation of incomes implying thereby taxation of agricultural incomes as well. The second is the need to use current legislation to ensure that the base referred to within exemption of agricultural income is kept as narrow as possible, as against expanding it. The paper is organised as follows: Section 1 provides a background to the study by highlighting the changes in the structure and organisation of agricultural operations in India in recent times. These changes indicate that the agricultural sector now has players who cannot solely be described as small farmers struggling to meet the food security challenge of India. There is an increasing presence of both commercial crops and commercial participants in this sector. Section 2 provides a summary of the state of taxation of agricultural incomes today. Section 3 briefly presents some of the current controversies in the treatment of this sector. While recognising the difficulty of achieving a pan India reform of comprehensive state level taxation of agricultural income, Section 4 brings to light the dilution of provisions within the Direct Taxes Code (DTC), which defeats the purpose of more comprehensive taxation. Section 5 presents a summary of policy options available.

1 Change in Structure and Organisation

The conventional view of Indian agriculture is that of a sector producing largely foodgrains, meant for self-consumption and for the market. This is considered a sector which supports 65% of the population for livelihood. Over the years, however, there is some change in the composition of the crops cultivated as well as in the forms of organisation in the agricultural sector. There is an increase in mechanisation in this sector which is changing the pattern of livelihood. The number of tractors per 100 sq km has increased from 50 in the late 1980s to about 200 by 2008 (Figure 1). While the total cropped area has increased from 185 to 195 million hectares since 1990-91, the share of foodgrains has remained static around 122 to 125 million hectares. This suggests that there has been some increase in the area devoted to non-foodgrain crops (Figure 2). This would include the fibre-yielding crops, like cotton and jute, oilseeds and spices as well as the entire range of horticultural crops like fruits and vegetables and in recent times, floricultural crops.

Figure 1: Tractors Per 100 Sq Km of Gross Cropped Area

140

120

80

40

0

Tractors/Gross cropped area

1950-51 1961-62 1972-73 1982-83 1992-93 1996-97 1998-99 2003-04 Source: Computed using Table 3.33 of Agriculture Research Data Book 2007 and Table 24 of Handbook of Statistics on Indian Economy 2011.

Figure 2: Percentage of Land Cultivated

80

60 Foodgrains

40

20

Non-foodgrains

0 1960-61 1970-71 1980-81 1990-91 1995-96 2000-01 Source: Computed from Handbook of Statistics on Indian Economy 2011, Tables 19 and 24.

While the change in the acreage is not dramatic, it has increasingly been reported that the returns on the cultivation of non-foodgrains are significantly higher than those from cultivation of foodgrains.1 This is borne out by evidence from the composition of the value of agricultural output as well. Figure 3 shows that while the share of cereals in the total value of

52

Figure 3: Share in Value of Output of Agriculture (%) 60

50

40

50

20

10

0 1950-51 1956-57 1962-63 1968-69 1974-75 1980-81 1986-87 1992-93 1998-99 2004-200705 08 Source: Computed from the National Accounts Statistics, 2011.

Cereals Fruits and vegetables Condiments and spices Sugars Other crops

output has declined over the years, especially since the 1970s, these crops have been systematically yielding space to the production of fruits and vegetables. The share of cereals has decreased to almost 30% from over 45%, while the share of fruits and vegetables has increased from 15% in the 1970s to 25% in recent times. It should be mentioned that this category of fruits and vegetables includes the value of output from floriculture as well. Some available details of the composition of this sector suggest that while the traditional crops of potato and banana have seen some increases in production, floriculture as well as an expanded range of horticultural crops has contributed to this increase in value of output somewhat disproportionate to the increase in acreage. This is an interesting trend, indicating that in terms of value of output there is a larger share of agricultural output which is responding to market signals and embracing diversification and higher value generation.

Another important dimension in Indian agriculture, which is finding a lot of place in discussions on this sector, is the growing presence of the corporate sector in various activities associated with this sector. There are corporates/companies reporting agricultural income and income from the sale of various agricultural products. (Table 1 (p 53) provides some summary statistics of companies from the PROWESS database of companies which reported agricultural income.) While the number of companies is not large, the corresponding incomes are not inconsequential, with over 50 companies reporting agricultural incomes of over Rs 100 crore, with their total agricultural incomes amounting to Rs 31,313 crore in 2009-10. It may be noted that all the companies in this compilation do not specialise in agricultural products alone. They include a variety of companies, for some of whom agricultural income is only a small fraction of the total sales. It should also be mentioned here that the incomes reported here would be an underestimate to the extent these companies have integrated operations and are utilising their own agricultural produce in their nonagricultural operations. For instance, any company which produces cotton and uses it to produce yarn or fabric for sale in the market, may not report the same as income from cotton. Further, since this compilation does not include firms and individuals with similar operations, the quantum of agricultural income reported by taxpayers reporting both categories of income too would be larger. What this does underscore is the noticeable presence of the corporate sector in agricultural operations. The presence of corporates in this field suggests that the traditional notion of agriculture as a small farmer cultivating

april 14, 2012 vol xlvii no 15

for his sustenance alone is undergoing some change. While it is true that the small farmer and agricultural labour households may not have been assimilated into this process of corporate farming, these do not remain the only categories in the agricultural sector today.

Table 1: Corporates Reporting Income from Agriculture

2007-08 2008-09 2009-10
1 Number of companies with positive income 617 682 608
2 Number of companies with agricultural income
above Rs 100 crore 51 65 68
2a Total agricultural income of these companies
(Rs crore) 23,580 27,850 31,313
3 Number of companies with over 50%
of income from agriculture 270 296 252
3a Total agricultural income of these companies
(Rs crore) 17,630 20,689 25,777
Taxes forgone corresponding to 2a 4,716 5,570 6,263
Taxes forgone corresponding to 3a 3,526 4,138 5,155

Taxes forgone are computed assuming an effective tax rate of 20%. Source: Compiled from Prowess.

Another form of interaction of the corporate sector with the agricultural sector is through propagation of contract farming. (Table 2 provides a list of some of the well-known interventions in the form of contract farming.) This intervention of the corporate sector into agriculture has two main components. The first component involves providing technical inputs into cultivation, thereby improving the quality and quantity of the crop produced. The second component relates to providing some form of cushion from the fluctuations in the price for the crop – either through prefixed prices for

Table 2: Contract Farming in India: Some Initiatives

products to be procured by the contracting company or by providing support in marketing the product. While the jury is still out on whether this move is necessarily beneficial to the farmers in India, what seems to be clear is that new institutions have emerged to address some of the concerns of the cultivators and thereby improving the returns to cultivators. The PepsiCo initiative in potato, it is argued, has been able to protect the farmers from the effects of a sharp fall in potato prices in the local market.2 The initiative of the Tata Group, through its company Rallis India, provides technical inputs as well as support to market the produce. Appachi Cotton provides a third model where the price of the product is not pre-negotiated, but the farmers, as a group, can negotiate with the company for the price, the market price being the benchmark. All of these initiatives indicate that there are changes in the structure of agricultural operations in India with an increase in the focus of technological inputs and some interventions to stabilise the price or at least to reduce price uncertainties.

2 Present System of Taxation
2.1 Definition of Agricultural Income

Entry No 82 of the Union List of the Seventh Schedule read with Article 246 of the Constitution empowers Parliament to make laws with respect to taxes on income “other than agricultural income”. Similarly, Article 246(3) read with Entry 46 in List II of the Seventh Schedule empowers the state legislature to make laws relating to tax

Sr No Name of the Company States Commodity on agricultural income. Accord

ingly, Section 10(1A) of the Income

1 Appachi Cotton Company Tamil Nadu (TN), Karnataka Cotton 2 AVT Natural Products Karnataka Marigold Caprica Chilly Tax Act, 1961 provides for exclu

3 Cargill India Madhya Pradesh (MP) Wheat, maize and soybeansion of agricultural income in the

4 Escorts Punjab Basmati computation of total income. Simi

5 The Global Green Company (Naan) Karnataka, Andhra Pradesh (AP) Gherkin, babycorn, paprikalar was the position relating to 6 Hindustan Lever MP Wheat

taxation of agricultural income

7 Ion Exchange EnviroFarms TN, MP, Gujarat, Haryana, Maharashtra Organic products of banana, pineapple,

even under the Government of

papaya, wheat, basmati, cotton

India Act, 1935 and the Income

8 ITC – IBD MP Soybean

Tax Act, 1922. Vide Article 366(1)

9 Ken Agritech Karnataka Gherkin

of the Constitution, the expres

10 Marico Maharashtra, MP, Gujarat, Karnataka, Safflower Chhattisgarh, Rajasthan sion “agricultural income” for the

11 Mahindra Shubhlabh services Maharashtra, Punjab Many crops above entries means agricultural 12 Natural Remedies Karnataka Coleus

income as defined for the purpose

13 Nestle India Punjab Milk

of the enactments relating to

14 Nijjer Agro Foods Punjab Tomato and chilly

Indian income tax.

15 Pepsi Foods Punjab, TN, West Bengal Chillies, groundnut, seaweed, tomato

Except for some occasional

and basmati rice

changes, which we shall discuss

16 Rallis India Punjab, UP, MP, Maharashtra, Basmati, wheat, fruits, vegetables Karnataka, TN subsequently, the core definition of

17 Satnam Overseas Punjab Basmati “agricultural income” both under 18 Super Spinning Mills TN Cotton

the 1922 Act and the Income

19 The Ugar Sugar Works Karnataka Barley

Act, 1961 remains remarkably

20 Unicorn Agrotech Karnataka Gherkin

unchanged. Accordingly, although

21 United Breweries Punjab Barley

there have been many litigations

22 CG Herbals Chhattisgarh, Orissa Patchouli, veiver, aromatic crops for

in regard to what constitutes agri

essential oil 23 Sanjeevani Orchards MP Pomegranate cultural income, the jurisprudence

Source: http://agmarknet.nic.in/ConFarm.htm in this regard has been more or

EPW
april 14, 2012 vol xlvii no 15

less settled. The seminal case in this regard is the case of CITvs Raja Binoy Kumar Sahas Roy.3 The essential elements of agricultural income as has been laid down by the Supreme Court in that decision are as follows:

  • The primary sense in which the term agriculture is understood is the cultivation of the field and in that sense relates to basic operations like tilling of the land, sowing of the seeds and planting and similar operations on the land. These basic operations require expenditure in terms of human labour and skill upon the land itself.
  • There are operations which are not basic in nature but are performed after the produce sprouts from the land like weeding, digging of the soil around the growth, preservation against insects and pests, tending, pruning, cutting, harvesting, etc, or rendering the produce fit to be taken to the market. These subsequent operations must necessarily be in conjunction with and a continuation of the basic operations. One cannot dissociate the basic operations from the subsequent operations and say that the subsequent operations can constitute agricultural operations by themselves.
  • The nature of the produce raised is not relevant, the produce could be either vegetables or fruits necessary for human consumption or pastures grown for beasts or for items like betel, coffee, tea, spices or tobacco or for the growth of commercial crops.
  • Mere association with land as in the case of breeding and rearing livestock, dairy farming, butter- and cheese- making and poultry-farming cannot be treated as constituting agriculture.
  • Almost all subsequent decisions have been rendered in the touchstone of the test as laid down in the aforesaid judgment.

    1970 Amendment: The definition of agricultural income in the Income Tax Act, 1961, inter alia, contained the following:

    any rent or revenue derived from land which is used for agricultural

    purposes and which is either assessed to land revenue in India or is

    subject to a local rate assessed and collected by the officers of the Gov

    ernment as such; ...

    Assessment to land revenue, etc, was the condition precedent before the income could be categorised as agricultural income. Thus, where the land in question was not assessed to land revenue or local and it was situated within the jurisdiction of the municipality of Dehradun, it was held that the income derived from such land could not be treated as agricultural income and the sale of lychee fruits was not agricultural income and was not exempt from taxes.4

    By the Taxation Laws (Amendment) (TLA) Act, 1970, a change was made in the above said definition of agricultural income. It was pointed out that in the recent years, agricultural operations were extended to the Terai areas or cantonment, where land is not assessed to land revenue and is not subject to any local rate and accordingly, income derived by agricultural operations of such land was outside the scope of the agricultural income, and hence, liable to central income tax. The definition of agricultural income was, therefore, amended so as to drop the condition that the land from which income is derived should be assessed to land revenue or any local rate.

    2.2 Change in the Definition of Farmhouses

    Agricultural income also includes income attributable to farm buildings which is required by farmers for residence, storage of grains and such other purposes. Hence, income from such farmhouses was also allied to the definition of agricultural income and was exempt. By the TLA Act, 1970, another change was brought about. While the condition of the land being subject to land revenue was dropped in the case of agricultural land, per se, in respect of farmhouses, this was a condition precedent. Where the land was not subject to land revenue, the farmhouse was to be situated outside urban areas to enjoy the benefit of the exemption.

    The effect of this modification was that income attributable to farmhouses situated in such “urban areas” was not treated as agricultural income unless the land on which the farmhouse was situated was assessed to land revenue or any local rate. However, in the case of farmhouses situated in “rural areas”, the income there from was treated as agricultural income even where the land on which the farmhouse was situated, was not assessed to land revenue or any local rate.5

    2.3 Change in the Definition of Capital Asset

    By the same TLA another change was brought about though not in the definition of agricultural income. This concerned the definition of a “capital asset”. Prior to 1 April 1970 capital gains from transfer of agricultural land were not subject to tax as agricultural land was excluded from the definition of “capital asset”. Through the amendment, it was laid down that the agricultural land situated in any urban area would be considered as capital asset, and hence, any gain arising from the transfer of such agricultural land in urban area was brought within the purview of capital gains taxation.6

    Thus, agricultural land in urban areas would henceforth constitute capital asset subject to capital gains taxation.

    1973 Amendment: The Committee on Taxation of Agricultural Wealth and Income (Raj Committee) suggested several measures for mobilising resources from the agricultural sector. The committee, inter alia, observed:

    The temptation to dress up large chunks of taxable income as agricultural in origin would be curbed to a considerable extent if the tax liability in respect of non-agricultural income is linked in some way with the aggregate income of an assessee comprising the receipts from both agricultural and non-agricultural sources. In other words, evasion through the device of camouflaging taxable income as gains from agriculture would cease to be paying if the disclosure of agricultural incomes entails a heavier burden of tax on non-agricultural incomes. We, therefore, propose that both the agricultural and non-agricultural components of a taxpayer’s income be aggregated and the tax on the non-agricultural portion be levied as if it were placed in the top slabs of the aggregate income…

    The committee thus suggested that agricultural and nonagricultural components of a taxpayer’s income should be aggregated and the tax on the non-agricultural portion levied

    april 14, 2012 vol xlvii no 15

    as if the latter were placed in the top slabs of the aggregate income. Integration of agricultural and non-agricultural incomes should take effect only if a taxpayer has taxable non-agricultural income exceeding the minimum exemption limit laid down for the levy of income tax.

    The Finance Act, 1973 accepted this recommendation and provided for partial integration of agricultural income. The same situation continues till date although with the gradual flattening of the top tax rates, its effectiveness is doubtful.

    The validity of this provision was challenged in some cases but has been upheld by the courts.7

    1989 Amendment: Despite the change in the definition of capital asset by the TLA Act 1970, certain courts, however, held that profits from sale of agricultural land itself constituted agricultural income and since agricultural income was exempt, the capital gains could also not be bought to charge. Therefore, an explanation was inserted by the Finance Act, 1989 to clarify that revenue derived from land shall not include any income arising from the transfer of such land. This provision too was challenged but was upheld – the Madhya Pradesh High Court held that under Article 366(1), the Constitution has adopted the definition of “agricultural income” as has been defined in the Indian Income Tax Act. Therefore, the amendment which was made by Parliament by inserting an explanation was within the competence of Parliament.8

    2000 Amendment: The definition of agricultural income, as we have seen, includes any income derived from any building owned and occupied by the cultivator or receiver of rent, etc. As a measure of widening the tax base, the Finance Act introduced an explanation in 2000 to clarify that any income from such building or land arising from the use of the building or land for any purpose other than agriculture shall not be included in the definition of agricultural income. For example, if a person has income from using such building or land for purposes such as letting out for residential purposes or for the purpose of any business or profession, then, such income shall not be treated as agricultural income.

    A conspectus of the legislative amendments and the case laws emerging out of the challenge to such amendments indicate that the centre has the power to bring in changes in

    Table 3: Coverage and Rates of Tax

    the definition of agricultural income for the purpose of enhancing or contracting the scope of agricultural income.

    2.4 Taxation of Agricultural Income

    Within the present constitutional assignment of tax powers in India, taxation of agricultural income is placed within the State List. However, though the states have the right to tax agricultural income, very few states have attempted to enter this arena. Table 3 shows the number of states that have a system of taxation of agricultural income in place today. Of these, for the most part, the tax is on plantation crops. While Assam does have a comprehensive levy, the revenue it gets is largely from tea. The rest of agriculture remains outside the purview of taxation at the present juncture.

    In terms of the revenue that these states have been able to mobilise from this tax, Table 4 shows that none of the states have been able to mobilise even 0.5% of their gross state domestic product (GSDP) from this source. The maximum revenue mobilised is that by Assam at 0.3% of GSDP for only one of the five years covered in the table. In nominal terms, the revenue collections of the states have varied between Rs 8 crore for Karnataka and West Bengal and Rs 78 crore in the case of Assam for the year 2009-10.

    Table 4: Receipts from Agricultural Income Tax as a Percentage of GSDP (in %)

    States 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

    Assam 0.045 0.049 0.018 0.020 0.093 0.336
    Karnataka 0.008 0.005 0.004 0.008 0.023 0.017
    Kerala 0.029 0.032 0.046 0.099 0.049 0.105
    Tripura 0.015 0.007 0.007 0.005 0.000 0.000
    West Bengal 0.004 0.003 0.002 -0.005 0.006 0.012
    Maharashtra 0.000 0.000 0.000 0.000 0.000 0.000
    Rajasthan 0.000 0.000 0.000 0.000 0.000 0.000
    Sikkim 0.000 0.000 0.000 0.000 0.000 0.000
    Tamil Nadu 0.003 0.001 0.000 0.000 0.000 0.000

    Source: Computed from budgets of individual states.

    While the revenue from agriculture can be substantial, there is very little possibility of any individual state attempting to explore this option and mobilising revenue there from. Given the considerable strength of the agricultural lobby in all major states, no state government can individually attempt to introduce a comprehensive tax on agricultural income. The only way such a reform can be implemented by the states is if

    States Coverage Single or Multiple Rates? Exemption Threshold Categories of Taxpayers
    Assam All agricultural income (revenue from tea) Multiple rates Rs 30,000 for individuals Individual, companies, firms
    Karnataka Cardamom, coffee, linaloe, orange, pepper, rubber and tea Multiple rates 30 to 50% _ Companies, firms
    Kerala All agricultural income excluding crops like paddy, tapioca, plantain, ginger, ragi, pulses, sesame, sweet potato, tubers, sugar cane, jackfruit, mango, pineapple, orchid or other flowers, vanilla, turmeric and guava Multiple rates 20 to 60% Rs 40,000 for individuals Individual, companies, firms
    Tripura West Bengal Maharashtra Tamil Nadu Rajasthan Total agricultural income Tea Abolished on 1 April 2004 Abolished on 1 April 2004 Inoperative Multiple rates 20 to 60% Single 30% Rs 1,500 _ Individual, companies, firms Individual, companies, firms

    Source: Compiled from the notes submitted to the 13th Finance Commission.

    Economic & Political Weekly

    EPW
    april 14, 2012 vol xlvii no 15

    majority of the states agree to take on the reforms simultaneously. Coordination among the states, however, has not proved to be an easy process, as is demonstrated by the process of introduction of state VAT in place of existing sales taxes, and now in the context of the introduction of the Goods and Services Tax. Another alternative route that has often been recommended by various studies is for the states to adopt a tax rental agreement with the union government, where the latter collects tax on income from agriculture as well, with the receipts being passed on to the respective states. While administratively this would be easier than the states attempting to set up the entire regime individually, it still requires the concurrence of majority of the states to be implemented.

    3 Change in the Composition of Agriculture: Recent Controversies

    Agriculture has undergone a massive change in India. There are many activities in this sector now which are either akin to or allied to manufacturing activities. Considerable research and development activities also are taking place. Naturally, such activities beyond the traditional farming methods create tension with the tax department with the latter trying to deny the benefits of the exemption to income from such activities. In this connection, we examine some of the case laws relating to such emerging activities.

    3.1 Nurseries and Pot Cultivation

    One of the important issues of dispute relates to the treatment of nurseries and the related sale of saplings and plants.9 In one of the notable cases, the assessing officer (AO) found that the assessee was maintaining a nursery at his residence. The AO was of the view that the nursery was maintained and run as a business quite independently of agriculture and that even if keeping of the nursery necessarily involves the use of some land and earth for the purposes of rearing plants, that would not by itself amount to carrying on a primary agricultural operation in the sense of cultivation of the soil. The AO noted from the photographs produced before him that all the plants were grown in earthen pots and these pots were placed on a concrete structure, which was either on the floor of the house or terrace. He also noted that most of the plants were placed in polythene bags and no use of land was evident from these photographs. Hence, he was of the view that the activities of the nursery were being carried out in earthen pots and no agricultural process was involved. In this case, the tribunal held that the AO should bring on record the nature of operations, viz, primary as well as secondary on the specific land area, and thereafter, apply the law laid down in the decided cases to the facts of the present case; he has to examine how the assessee can be said to be carrying on agriculture in the primary sense, i e, tilling of the land, sowing of seeds and planting and doing other operations of the land. After examining this aspect, he has to examine the secondary operation carried out by the assessee. Such direction issued by the tribunal was upheld by the high court observing that mere performing of the secondary operation will not make the assessee’s activity an agricultural activity. It

    56 may be noted here that for a number of nurseries, the primary activity is procurement and sale of plants and saplings rather than the cultivation of saplings and plants per se.

    Surprisingly, however, through the Finance Act, 2008, an explanation was added to the definition of agricultural income to the effect that any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income. Accordingly, irrespective of whether the basic operations have been carried out on land, such income will be treated as agricultural income, thus qualifying for exemption under Sub-section (1) of Section 10 of the Act.

    3.2 Tissue Culture

    The taxpayer was in the business of growing and exporting of ornamental plants and claimed entire income as exempt.10 The AO, after visiting the premises came to the conclusion that the taxpayer was carrying on tissue culture methodology and some of the activities were non-agricultural and accordingly, he bifurcated the income. In appeal, the tribunal held that the plant tissue culture is used to reproduce clones of a plant with the same traits by placing various tissues of the mother plant in containers and required medium which is definitely not land or soil and that when any operation is not carried out on land, such an operation cannot be called as an agricultural operation.

    3.3 Seed Companies

    In recent years, there have been quite a few tax cases, involving seed companies which employ modern methods of generation and propagation of seeds. While the Mumbai Tribunal in the case of Monsanto has held the income from sale of seeds to be agricultural income, the Delhi Tribunal in the case of Pioneer Overseas and Proagro Seeds has held the same to be non-agricultural in nature.11

    In the case of Pioneer Overseas, the multinational used to make scientific studies of parent seeds and through hybridisation of different varieties of the parent seeds evolve the highyielding variety of hybrid seeds, which were then sold to the farmers. The sale proceeds were claimed to be exempt for being agricultural income in nature. It was found that the hybrid seeds are so engineered that when the crops from it are used as seeds, the yields are much less. The seeds are thus generated by certain involved processes, which an ordinary farmer cannot do and he has to again revert back to the producer of the hybrid seeds for a subsequent crops if he wants similar results of high production in the subsequent crops. The claim of exemption was thus denied.

    3.4 Contract Farming

    In the case of Namdhari seeds, the taxpayer declared income generated from the sale of hybrid seeds on land taken for contract farming as agricultural income.12 It was in the business of cultivation, production and marketing of open-hybrid seeds both for domestic and international markets and it entered into an agreement with farmers for production of open-hybrid tomato seeds. The farmer owned the land and agreed to cultivate the hybrid seeds specified by the assessee.

    april 14, 2012 vol xlvii no 15

    He also undertook to observe all the conditions regarding the cultivation and other incidental matters; agreed to allow the personnel of the company to operate on the land, machinery, implements and accessories. He further undertook to hand over all the hybrid seeds and not to sell or part with or retain for himself any portion of the seeds. In exchange, the company agreed to pay him compensation at the rate of Rs 3,200 per quintal for hybrid tomato seeds.

    On an analysis of the agreement and the terms, the Karnataka High Court held that the entire terms of agreement would only indicate that the foundation seeds grown by the farmer would be purchased by the assessee at the end for a certain price provided the seeds qualify the specifications as per the agreement. In the words of the high court:

    It is nothing short of a fertile womb being offered by a surrogate mother for the growth of child of someone else. The assessee supervises and oversees the sowing, cultivation right from the process of sowing till the end in order to get the qualified foundation seeds as per the specifications so as to carry on his trade in selling certified seeds. The main interest of the assessee is to see that good and healthy seeds are produced by the farmer meeting the requirement specified by it.

    The court held that such input or scientific method in giving advice to the farmer cannot be termed as either basic agricultural operation or subsequent operations ordinarily employed by the farmer or agriculturist. If the basic operations of agriculture are not carried on by the assessee-company, then the harvested foundation seeds purchased by him and converting them to certification seeds cannot be termed as integrated part of the foundation activity of agriculture.

    3.5 Changes Proposed by the DTC

    Having seen the development of the law and having observed the judicial analysis, the following features can be noted. The legislature in the past has restricted the meaning of agricultural income and such measures have passed muster. Courts have also not given a very wide meaning to the term “agricultural income” and have in many cases adopted a restrictive meaning. Thus, when a new beginning was being made in the DTC, it was possible to make intelligent use of the leeway given by the judiciary and bring in provisions which would restrict the scope of agricultural income particularly in areas like hybrid seeds, where the market is immense and scope of profits large. It is against this backdrop that we can now examine the changes proposed by the DTC in this regard.

    4 Implications of DTC Provisions

    The current definition of agricultural income has three components: (1) the rent from the agricultural land; (2) the income derived from such land by agriculture; and (3) income from farmhouses (Table 5, p 58).

    Insofar as the first element is concerned, there is no difference between the current definition and the definition that has been proposed in the DTC except for the fact that the reference to “revenue” from the agricultural land does not find place in the new definition. The main component of the definition of agricultural income is the income derived from the land by

    Economic & Political Weekly

    EPW
    april 14, 2012 vol xlvii no 15

    agriculture. The current law also restricts the process that can be applied to agricultural produce by stipulating that the process should be such as ordinarily employed by a cultivator to render the produce fit to be taken to the market. It is also stipulated that the sale of the final produce should not be subject to any process other than that necessary for rendering the produce fit to be taken to the market. It is by reference to these restrictions that courts and tribunals have, in cases involving modern-day agriculture, turned down the claim of exemption. However, the language used by the DTC in this regard is “any profits and gains derived from cultivation of agricultural land”. The language is completely different and is capable of encompassing within its fold all incomes which might be derived from the cultivation of the land. The restriction that the process employed must not be beyond what is employed by a cultivator to render the produce fit to be taken to the market, no longer finds the place. Accordingly, it can be concluded that the ambit of agricultural income has been significantly extended.

    Agricultural land has been defined in the DTC as land which is used for agricultural purposes and is assessed to land revenue in India. The assessment to land revenue was a condition prior to 1970. As we have seen above, the TLA Act removed this condition, on the ground that there may be land itself not assessed to land revenue. Accordingly, it is possible to take a view that in respect of those states where no land revenue is charged, the income from agricultural land will no longer be considered as agricultural!

    Insofar as the farmhouses are concerned, the existing condition for treating income therefrom as agricultural in nature is that the building must be in the immediate vicinity of the land and that the same must be required by the cultivator as a dwelling house, store house or outhouse and the land must be assessed to land revenue. Where it is not so assessed, the farmhouses must not be situated in any urban area. In the DTC, “farmhouse” has been separately defined and incorporates the condition of being in the vicinity of the agricultural land and exclusively for dwelling house, store house or outhouse or for carrying out any process for taking the agricultural produce to the market. However, the condition of being subject to land revenue is absent as also the stipulation that where the land is not subject to land revenue it should be outside the urban areas. As we have seen, an explanation was inserted in the Finance Act, 2000, whereby the income from house of farmhouse for any purpose other than agriculture was not considered as agricultural income. This explanation or components thereof do not find a place in the DTC. Accordingly, it is possible to argue that any income from any farmhouse whether rural or urban, whether used for the purpose of renting out for marriage party or not, will now be considered as agricultural income.

    The DTC also specifically gives exemption from the income derived from saplings or seedlings grown in a nursery. This was an explanation introduced in 2008 and has been carried over in the DTC.

    To sum up, it is not clear whether the stipulation of the agricultural land being subject to land revenue is a deliberate attempt to change the coverage of agricultural income. There

    Table 5: A Comparison of the Provisions Pertaining to Agricultural Income

    Present Provisions Provisions as per DTC

    (1A) “agricultural income” means (11) “agricultural income” means the following income, namely:-
    [a] any rent or revenue derived from land which is situated in India and is (a) any profits and gains derived from cultivation of agricultural land;
    used for agricultural purposes; (b) any rent derived from any agricultural land;
    [b] any income derived from such land by- (c) any rent derived from any farmhouse; and
    (i) agriculture; or (d) any income derived from saplings or seedlings grown in a nursery.
    (ii) the performance by a cultivator receiver of rent in kind of any process (12) “agricultural land” means any land “situated in India” which is “used for
    ordinarily employed by a cultivator or receiver of rent in kind to render, agricultural purposes” and: -
    the produce raised or received by him fit to be taken to market; or (a) is assessed to land revenue in India; or
    (iii) the sale by a cultivator or receiver of rent in kind of the produce raised (b) is subject to a local rate assessed and collected by the officers of
    or received by him, in respect of which no process has been performed the government as such;
    other than a process of the nature described in paragraph (ii)
    of this sub-clause;
    [c] any income derived from any building owned and occupied by the receiver 314(96) “farmhouse” means any building which fulfills the following
    of the rent or revenue of any such land, or occupied by the cultivator or the conditions, namely: -
    receiver of rent-in-kind, of any land with respect to which, or the produce (a) it is situated on, or in the immediate vicinity of, the agricultural land;
    of which, any process mentioned in paragraphs and (ii) of sub-clause (b) (b) the building is used exclusively -
    is carried on: (i) as a dwelling house, store-house, or other out-building, for agricultural
    [Provided that - purpose; or
    (i) the building is on or in the immediate vicinity of the land, and is a (ii) to carry out any process to render the produce raised or received by the
    building which the receiver of the rent or revenue or the cultivator, owner fit to be taken to the market; and
    or the receiver of rent-in-kind, by reason of his connection with the (c) the building is -
    land, requires as a dwelling house, or as a store-house, or other (i) occupied by the cultivator or the receiver of rent-in-kind; or
    out-building, and (ii) owned and occupied by the receiver of rent.
    (ii) the land is either assessed to land revenue in India or is subject to a
    local rate assessed and collected by officers of the government as such
    or where the land is not so assessed to land revenue or subject to a
    local rate, it is not situated-
    (A) in any area which is comprised within the jurisdiction of a municipality
    (whether known as a municipality, municipal corporation, notified area
    committee, town area committee, town committee or by any other name)
    or a cantonment board and which has a population of not less than
    10,000 according to the last preceding census of which the relevant
    figures have been published before the first day of the previous year; or
    (B) in any area within such distance, not being more than eight kilometres,
    from the local limits of any municipality or cantonment board referred
    to in item (A) as the central government may, having regard to the
    extent of, and scope for, urbanisation of that area and other relevant

    considerations, specify in this behalf by notification in the Official Gazette].

    Explanation 1 – For the removal of doubts, it is hereby declared that revenue derived from land shall not include and shall be deemed never to have included any income arising from the transfer of any land referred to in item (a) or item (b) of sub-clause

    (iii) of clause (14) of this section.

    Explanation 2 – For the removal of doubts, it is hereby declared that income derived from any building or land referred to in sub-clause (c) arising from the use of such building or land for any purpose (including letting for residential purpose or for the purpose of any business or profession) other than agriculture falling under sub-clause (a) or sub-clause (b) shall not be agricultural income.

    Explanation 3 – For the purposes of this clause, any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income.

    The portions in italics refer to content that has undergone change.

    is no discussion in the discussion draft or the revised discussion draft released at the time of introduction of DTC, as also no discussion in the press in this regard. It is possible that this could be a mistake. However, apart from the above, the other changes discussed above increase the scope of agricultural income rather than restricting the same.

    5 The Way Forward

    A recent report at the time of the Punjab elections indicated that there are candidates from political parties across the spectrum who had income of more than Rs 100 crore, but

    58 had never filed any return of income.13 Most probably, all these persons would have shown income from agriculture. There is absolutely no justification for such a state of affairs to continue. Considering the division of legislative power between the centre and the states, the following are the alternatives available:

    (1) Within the present dispensation of tax powers, the right to tax agricultural income lies with the state governments. However, it is well recognised that while most of the state governments can benefit from the additional revenue this could provide, it may be politically unacceptable for any political party

    april 14, 2012 vol xlvii no 15

    to attempt such a measure unilaterally. State-level reforms would, therefore, need either a consensus to jointly implement the tax on some common agreed norms, or even to enter into a tax rental arrangement with the union government. If this is considered a significant enough source of revenue, it might even be worthwhile for the finance commission to assess the potential and find some means of incentivising the introduction of such a tax. This route clearly worked for the adoption of Fiscal Responsibility Acts by the state governments. Here it may be mentioned that while the state governments do seek to safeguard their autonomy, the right to choose not to levy a tax should be accompanied by the responsibility to bear the cost of the resultant short fall in revenue as well!

    (2) In the absence of the above, it may be a difficult proposition for the centre to bring all such people under the tax net. To tax such income, therefore, one has to explore the possibilities of taxing at least a part of agricultural income within the present parameters. It is in this context that the definition of “agricultural income” under the Income Tax Act can be used to at least bring a part of the income from agriculture to tax by restricting the ambit of agricultural income to only some crops or processes. In the past, attempts have been made to restrict the income from farmhouses. Such legislations have also withstood judicial scrutiny. Therefore, the DTC provided an ideal opportunity to attempt an exercise in that direction. Unfortunately, no attempt has been made. The discussion paper released at the time of the introduction of the DTC is completely silent in regard to this vital aspect of taxation. Obviously, no suggestions have also been received in this regard. To begin with, income from cash crops and similar produces can be taken out of agricultural income by stipulating that the processes involved therein would not constitute agricultural income. Of course, for this purpose, a thorough study has to be made to properly identify the processes and describe the same. The income of multinationals from growing and selling hybrid seeds has been held to be non-agricultural by some courts. It is necessary to actually spell this out in the form of an explanation rather than leave the litigation to fester. The DTC, by using a different language, seems to bring such income also under “agricultural income”. Wherever there is a significant value addition after the produce is brought out from the soil, it can be kept out. On the contrary, the DTC seems to omit any reference to the “process” itself.14 Similarly, there is absolutely no reason why income from farmhouses, particularly those in the vicinity of urban areas should not be taxed. The DTC, in fact, is quite regressive in this regard in that instead of restricting the scope, it seems to have enhanced the same.

    Notes

    1 Sushil Kumar et al (2001), “Higher Yields and Profits from New Crop Rotations Permitting Integration of Mediculture with Agriculture in the Indo-Gangetic Plains”, Current Science, 80 (4), pp 563-66. Surabhi Mittal (2007), “Can Horticulture Be a Success Story for India?”, ICRIER Working Paper No 197.

    2 See http://www.livemint.com/2010/03/25213353

    /Problems-of-plenty-for-West-Be.html. 3 32 ITR 466(SC). 4 Smt Anand Bala Bhushan vs CIT [217 ITR 144

    (Allahabad)].

    5 Any area which is outside the jurisdiction of any municipality or cantonment board having a population of not less than 10,000 persons and also beyond the notified distance outside the limits of any such municipality or cantonment board.

    6 Area comprised within the jurisdiction of a municipality or a cantonment board (having a population of not less than 10,000) or in any area outside the limits of any municipality or any cantonment board (having a population of not less than 10,000) up to a maximum distance

    Appendix

    of eight kms from such limits as notified by the central government.

    7 In KJ Joseph vs ITO, 121 ITR 178, the Kerala High Court held that the charge of tax is still on nonagricultural income. No part of the agricultural income is subjected to tax. For the purposes of determining rate at which non-agricultural income is to be taxed, the agricultural income is taken into account. This and the differential rates are based on the different sources of income available to the persons concerned. It is only in respect of persons who have agricultural income, in addition to non-agricultural income that the mode of computation of the rate of tax as provided by the impugned provisions is adopted. This classification is reasonable and based on the intelligible differentia.

    In KV Abdulla vs Income-Tax Officer and Another 161 ITR 589, the Karnataka High Court held that making the burden of tax on the net income heavier in proportion to the increase in the agricultural income cannot be said to be unreasonable. An assessee with agricultural income occupies a position of economic superiority by

    Total Potential Agricultural Income Tax Revenue in India: An Estimate

    This exercise is an attempt to estimate the total potential income tax revenue from agriculture in India. The estimation is done through a landbased, crop-specific, agricultural income calculation for all major crops: foodgrains, pulses, cereals, oilseeds, fibre crops, horticulture and floriculture. The estimate is for all India and is for the year 2007-08.

    First the area, production and yield1 figures are obtained for each crop. Since cropping intensity affects the yield, yield of crops, that are sown more than once a year, are adjusted for double cropping (assuming there are no multi cropping). This is done by obtaining the “span” for each crop, i e, the time required for a crop to mature from seed to crop. Then, for crops with span less than six months, we double the yield. For annual crops, the yields are kept unchanged. We call this new set of yields “adjusted yield”. The adjusted yield for every crop is then multiplied with the annual average of their respective mandi (market) prices.2 This gives us crop-specific revenue (per unit of area). Assuming costs are 15% of the total revenue,

    Economic & Political Weekly

    EPW
    april 14, 2012 vol xlvii no 15

    reason of his larger income and to make his tax liability heavier is not arbitrary, but is only an attempt to proportion the payment to capacity to pay and then arrive, in the end, at a more genuine quality.

    8 Singhai Rakesh Kumar vs Union of India [227 ITR81]. 9 Jugal Kishore Arora vs Deputy Commissioner of Income-Tax [269 ITR 133]. 10 Invitro International vs Deputy Commissioner of Income Tax [2011-TIOL-445-ITAT-Bang].

    11 Monsanto India vs Addl Commissioner of Income Tax [2011-TIOL-169-ITAT-Mum], Proagro Seeds Company Limited vs Joint Commissioner of Income Tax [2003-TIOL-50-ITAT-Del], Pioneer Overseas Corporation vs Dy Director of Income Tax [2010-TIOL-54-ITAT-Del].

    12 The Commissioner of Income Tax vs M/s Namdhari Seeds Pvt Ltd[ Manu/KA/1614/2011].

    13 “Punjab Crorepati Politicians Don’t Fill IT Returns” =Timeshttp://timesofindia.indiatimes.com/ india/Punjab-croreppati-politicians-dont-fillit-returns/articleshow/11630574.cms

    14 Except in the case of farmhouses.

    crop-specific agricultural income (per unit of area) is calculated by adjusting revenue for these costs.3 Area at which the activity breakseven for tax purposes is calculated for every crop, based on the following formula: (Rs 1,50,000/Income per unit of area). The assumption applied on the above calculation is that the threshold at which income becomes taxable is Rs 1,50,000. The analysis, hereinafter, is divided into two parts. Crops are divided into two categories:

    Crop Group I: (Foodgrains, Pulses, Cereals, Oilseeds)

    Crops in these group yield moderate income (~ Rs 25,800 per hectare on an average), and breakeven (lower limit of tax bracket) at an area ~ 6 hectares on an average.

    Crop Group II: (Horticulture and Floriculture)

    These crops yield very high income (~ Rs 2,68,840 per hectare on an average), and breakeven (lower limit of tax bracket) at two hectares on an average.

    It may be mentioned that tea and coffee and rubber have been kept out of this exercise, since they face some form of taxation even within the present regime.

    For Crop Group I, we then look into the estimated number of household with operational landholdings greater than 7.5 hectares in rural India from the National Sample Survey report (2002-03) on operational landholding.4 It also provides us with average operational landholding for every landholding class.

    Assuming income per hectare = Rs 20,000 (Rs 1,50,000/6) and given, the average operational area, we calculate total income of household, for each operational landholding class, which is greater than six hectares. Appropriate rates of taxation are applied to the taxable income (where income is greater than Rs 1,50,000) to obtain average tax revenue for each operational landholding class. These average tax revenues for each operational landholding class are then multiplied to the respective estimated number of households in that class to obtain total tax revenue for every operational landholding class. This is done separately for both kharif and rabi crops. The sum of the total income from rabi and kharif crops give us the total potential agricultural income tax revenue from Crop Group I: major foodgrains, pulses and oilseeds.

    For Crop Group II, the area at which the cultivators of these crops cross the exemption threshold is small. The total income from these crops is derived by multiplying the area under cultivation by the income per hectare. Further, it is assumed that all these households pay tax at 10% rate. This provides the first approximation of the tax that can potentially be collected. However, it is not possible to get information on the size classification of households cultivating these crops. Therefore, it has been assumed that the distribution of households by size class in these crops is the same as that for cereals and pulses. So as to exclude the small taxpayers even in this category of crops, the share of land cultivated by households cultivating over two hectares in the total land cultivated is used to derive the income tax that can justifiably be anticipated. Given that the average tax rate is assumed to be 10%, which is the lowest statutory rate, this may be considered a fair estimate, since it does not attribute higher revenue from higher rates of tax as well. For the taxable households in the case of cereals, the

    1 Total potential agricultural income tax revenue (in Rs crore) (2+3) 50,395

    2 Total potential agricultural income tax revenue from major foodgrains, cereals, pulses and oilseeds 12,701

    3 Total potential agricultural income

    tax revenue from vegetables, fruits,

    spices and flowers 37,694

    4 Percentage of total direct tax revenue 2007 15.8

    5 Percentage of GDPMP (at constant price) 2007 1

    overall average tax rate works out to 13.3% of total income.

    Limitations

    These estimates need to be read with some caution, for the following reasons: (1) The analysis is based on household income, while the tax brackets are based on individual income, (2) the reporting of data relating to span of some crops are informal, and (3) agricultural cost is assumed to be 15% of total revenue (yield X price). Agricultural costs in reality may vary across crops and regions.

    Notes to appendix

    1 Area, Production and Yield Source: Agricultural Statistics at a Glance 2010, Department of Agriculture and Cooperation, Ministry of Agriculture; CMIE Agriculture, 2010, FAO Statistics for India 2007.

    2 Average mandi prices for 2007 are calculated for every crop, using the commodity wise daily price data available in Agricultural Marketing Information Network, Directorate of Marketing and Inspection (DMI), and Ministry of Agriculture.

    3 The computation of domestic product from agriculture in the national accounts statistics gives an overall number of 29% for agriculture and livestock put together. After segregating the inputs for these two sub-sectors of activities and proportionately allocating any common inputs like electricity, the ratio of inputs to value of output for agriculture works out to 17.56%. These inputs however include seed. Since seeds are also a part of the agricultural sector, if inputs are corrected for this overstatement, the costs reduce to 15% of total output.

    4 NSS Report No 492: “Some Aspects of Operational Landholdings in India, 2002-03”.

    april 14, 2012 vol xlvii no 15

    Dear reader,

    To continue reading, become a subscriber.

    Explore our attractive subscription offers.

    Click here

    Comments

    (-) Hide

    EPW looks forward to your comments. Please note that comments are moderated as per our comments policy. They may take some time to appear. A comment, if suitable, may be selected for publication in the Letters pages of EPW.

    Back to Top