BackWhy some netas have the most productive agri land
It is perhaps time that this gaping loophole is plugged by amending the Constitution
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Over the past few weeks, we have been reading much about large gains made by politicians and their relatives from dealings in land over a short period of time. One reads about land purchased for very low valuation and sold within a year or two at a significantly higher valuation. A question that arises is whether such income has been subjected to tax, or whether it has escaped tax altogether. What is the tax impact of such transactions in land?
Land may be held either as stock in trade (i.e. the owner is carrying on the business of trading in land) or it could be held as a capital asset (as an investment with the intention of either letting it out or benefiting from appreciation).
In case of land held as a capital asset, if it is held for three years or less, the gain would be regarded as a short-term capital gain. It would be a long-term capital gain only if it is held for more than three years. Short-term capital gains on sale of land is subjected to tax at the normal rate of tax (30% in the highest tax slab), while long-term capital gains is subjected to tax at 20%. Besides, long-term capital gains is computed after adjusting the cost for inflation by applying the cost inflation index, thereby effectively reducing the chargeable capital gains and accordingly the tax on capital gains.
Where the land is held as a stock in trade or trading asset, the gains made on sale of land are taxable at the normal rates of tax, which would be 30% in most cases.
The tax provisions, therefore, seem fairly straightforward and such gains should have been subjected to tax—considering large amounts involved, about 30% tax should have been payable on such gains.
However, there is one major loophole in the tax laws pertaining to capital gains on sale of land. If the land is agricultural land, it is not regarded as a capital asset and any gains on sale of agricultural land is completely exempt from tax. It does not matter whether the land is held for more than three years or less than three years—any capital gains on sale of agricultural land is not subject to tax. Normally, agricultural land would not be held as stock in trade and, therefore, the benefit of the exemption from capital gains would be available. It is only certain types of agricultural land, such as those located within the municipal limits or within 8 km of such limits in the case of certain specified cities, which is not regarded as an exempt asset and is treated as a capital asset, the sale of which gives rise to taxable capital gains.
The reason for such exemption is that the levy of taxes on agriculture is a state subject and not within the purview of the Central government. Since the income-tax law is a central law, it cannot levy any tax on agricultural income, including gains on sale of agricultural land.
Unfortunately, today this loophole is exploited by most politicians to launder their unaccounted money. Instances which readily spring to mind are those of a chief minister, who showed significant agricultural income, making this agricultural land the most productive in the country and of the union minister accused of taking a bribe and found having made large payments of insurance premium, who revised his return of income increasing the amount of agricultural income disclosed by him from horticulture from a few lakhs to a few crores.
It is perhaps time that this gaping loophole is plugged by amending the Constitution and subjecting all agricultural income, including gains on sale of agricultural land, to income-tax. Small agriculturalists can be spared the burden by giving them a benefit of exemption of agricultural income of a few lakh rupees, in addition to the normal basic exemption available to all taxpayers. Besides, a genuine agriculturist would continue to get the benefit of capital gains exemption on sale of agricultural land by reacquiring another agricultural land under section 54B.
The question, however, is whether one can ever expect such a change in our tax laws to be carried out by political parties and politicians, who have a vested interest in continuing to allow agricultural income to be exempt from income-tax.
Gautam Nayak is a chartered accountant.
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