Income Tax: Only 0.39% farmers in India eligible to pay income tax even if asked

Niti Aayog member Bibek Debroy cooked up a storm earlier this week when he said that agriculture in India should come under the purview of income tax. So severe are the political implications of such a move that Finance Minister Arun Jaitley immediately swung into action and denied any such thought within the government. 

Niti Aayog, Government's in-hosue think tank, too distanced itself from the statement and said that it was Debroy's personal opinion. 

Debroy, in this defence, said that bringing agriculture under income tax net would increase the abysmal tax base and the money thus raised would be used for social sector reforms and expenses. 

To his credit, Debroy said that farm income over a certain threshold should be brought within the income tax net. 

He said,"I don't believe in artificial distinction of rural and urban, so whatever is the threshold on personal income side on urban side, should be the exactly same on rural side."

In its data released in 2016, India's Income Tax Department (IT) said that less than 4% Indians pay income tax. 

The data showed that less than 5 crore people paid income tax in the year 2014-15 with only 13 lakh revealing incomes of over Rs 10 lakh a year. 

Finance Minister Jaitley, during his Union Budget 2017 Speech, said, "India’s tax to GDP ratio is very low, and the proportion of direct tax to indirect tax is not optimal from the view point of social justice.” 

Jaitley said that in 2015-16, the numbers of Indians paying income tax fell to 3.7 crore out of which 2.94 crore fell below the minimum taxable income of Rs 2.5 lakh a year or earn less than Rs 5 lakh a year. 

The data further showed that people earning between Rs 5 to 10 lakh a year stood at only 52 lakh while 24 lakh people earned more than Rs 10 lakh in 2015-16. Only 1.72 lakh people earned more than Rs 50 lakh in the given year. 

Although no one in India escapes from the clutches of indirect taxes like service tax, value added tax, sales tax, etc, the country remains notoriuously low when it comes to taxing its citizens for their yearly incomes. 

Census data of 2011 revealed that while nearly two-thirds of India is still dependent on agriculture as its mainstay, 56% of all workers in India were part of the agriculture and allied sectors while farm's contribution to India's GDP now stands at near 15%. 

What this simply means is that 56% of all workers in India and two-thirds of over 125 crore Indians are exempt from paying any income tax. 

Farm income

The income tax data of 2015-16 show that 1.55 crore people earned Rs 2.5 lakh or less in the given year and were exempted from paying any income tax. While those who earned between Rs 5 to 10 lakh stood at 67 lakh. These two alone account for half of the 3.91 crore income tax returns filed in the given year. 

Thiagu Ranganathan, Assistant Professor, Agriculture Economics Research Unit, Institute of Economic Growth, in his paper titled Farmers' Income in India: Evidence from Secondary Data, in 2014 said, "Farm households earned Rs 77,888 in the period from July 2012 to June 2013 or Rs 6491 per month during this period."

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"During the same period from 2002 to 2003 the earning of the farm households, based on a similar survey by NSS, was Rs 2,115 per month. This translates to a CAGR of 3.4% for real household incomes during the period from 2002-03 to 2012-03," he said. 

Interestingly, Ranganathan noted, "Among farm households having different principal income sources, those having nonfarm incomes earned the most – Rs 1,04,593 in July 2012- June 2013. But, these households constitute only 4.7% of total farm households."

"Households with wage/salaried employment as principal income source earned Rs 92,132 in the same period and are 22% of total farm households. 63.5% of farm households have crop cultivation as their primary income source and earn on average Rs 74,977 in the period. Households with livestock as primary income source constitute 3.7% of total farm households and earned Rs 76,639 in the period."

Ranganathan's data, which was submitted to the Ministry of Agriculture, further reveal that Across landholding classes, the lowest land class (with less than 0.01 ha land) earned Rs 54,147 in the period while the largest land class (with greater than 10 ha land) earned Rs 4,52,299 in the period. The lowest land class earned 1% of their incomes in crop cultivation while the largest earned 86% of their total incomes from crop cultivation."

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Ranganathan's research showed that income from farm came under the lowest income tax net (Rs 2.5 lakh to Rs 5 lakh bracket) only for 0.39% of farmers (Rs 4.24 lakh) with land holdings of over 10 hectare. 

Farmers with 4 to 10 hectare of agriculture land were just 3.72% of the total and earned Rs 1,82,916 lakh in 2012-13 -- much lower than Rs 2.51 lakh to qualify to pay income tax. 

Most farmers (34.92%) owned land between 0.4 to 1 hectare and earned Rs 25,726 in 2012-13 followed by 0.01 to 0.4 hectare land holding for farming at 31.86% of the total farm households earning only Rs 8,232 in 2012-13. 

Even if one has to club income from farming, livestock, nonfarm business, wages and salary, total annual income of farm households with land holdings of 4 to 10 hectare would be only Rs 2.34 lakh -- lower than Rs 2.51 lakh which is the lowest earning limit to pay income tax. Those 0.39% farmers with average land holding of 15 hectare would earn marginally more than Rs 4.28 lakh, at Rs 4.52 lakh in 2012-13. 

He said, "For the lowest two landholding classes, wages form the most important source of income contributing to 63% and 57% of household income. Importance of crop cultivation incomes increase along with landholding sizes with it contributing to just 1% of the lowest landholding class and 86% of household income to the largest landholding class."

In other words, most farmers or individuals earning their majority income from farms in India will not come under income tax net given the current income tax slabs of no income tax for income up to Rs 2.5 lakh. 

Among different states, Chandigarh farm households earned Rs 2,60,046 in July 2012 to June 2013 or approximately Rs 21,671 per month while farm households in Bihar earned Rs 44,172 in the same period or approximately Rs 3,681 a month, data showed.

Ss it just a question of political capital needed to tax less than half a percent of total farmers in India with average land holding of 15 hectare earning nearly Rs 4.5 lakh?