There is a figure on the number of people who submit income tax returns, and there is a parallel figure on the number of people who pay income taxes. The latter is smaller than the former, and with a country of India’s size, both figures should be higher. Direct taxes are inherently superior to indirect taxes, and the share of direct taxes to total taxes should be higher.
There are several reasons why such numbers aren’t higher, evasion being one. But there are two other reasons—exemptions and non-taxation of agricultural income. The former is part of the Union Budget, and the latter isn’t. The latter is part of State Budgets or should be. The Seventh Schedule demarcates such matters. Entry 82 in the Union List mentions taxes other than agricultural income, while Entry 46 in the State List mentions taxes on agricultural income. Whether agricultural income should be taxed or not is for state governments to decide. Let’s say 45% of the labour force (the figure varies a bit) is employed in agriculture. As a rough indication, we keep 45% of the labour force outside the income tax net. The argument that farmers are poor won’t wash. Are all farmers poor? That can’t be true. Income taxes must be paid if one’s income is above a threshold, irrespective of whether one is a farmer. The poor will be exempt, regardless of whether they are in agriculture.
At this time of the year, we should remember James Wilson, not because he established The Economist magazine and Chartered Bank of India, Australia and China (which later became Standard Chartered Bank). He was the first Finance Member of the Viceroy’s Executive Council. We should remember him because he was the first to present a budget. He also introduced the Income Tax Act of 1860. Are farmers poorer now than they were in 1860? Clearly not. The 1860 legislation taxed agricultural income, of course, above a threshold. All those income tax provisions were meant to be temporary (five years), and they eventually lapsed.
Those who develop apoplexy at the mention of taxing agricultural income should read the report of the Indian Taxation Enquiry Committee (1924–25). I will give a longish quote since it is educational on history and equity issues.
These arguments are incontestable. But let’s ask a different question. Until the 1960s, we generally (not just economists and committees) seemed to accept the idea that agricultural income should be taxed. But since the 1970s, this has transformed into a proposal that raises blood pressure. What accounts for the change?
As the Green Revolution spread, I suspect the answer is the political clout that pressure groups of large farmers came to represent. Perversely, agricultural prosperity, not penury, led to agriculture not being taxed. As in other areas of agricultural policy, policies that benefit large farmers started to masquerade as policies for farmers. This does sound like a sweeping generalisation. But I can think of no better explanation. Which states are most luxury cars sold in? This may be an imperfect surrogate indicator, but it does tell us something.
If there are villages in India that have been described as the richest villages on Earth, and we don’t tax agricultural income, something doesn’t sound right. To state it directly, it is wrong.
Bibek Debroy
Chairman, Economic Advisory Council to the PM
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