Taxing rich farmers may hold key to bridging India’s fiscal gap

Thousands of rich landowners who don’t need to pay taxes thanks to laws designed to help subsistence farmers


Rich Indian landowners don’t need to pay taxes thanks to laws designed to help the hundreds of millions of poor farmers who scratch a living from India’s soil. Photo: Hemant Mishra/Mint
Rich Indian landowners don’t need to pay taxes thanks to laws designed to help the hundreds of millions of poor farmers who scratch a living from India’s soil. Photo: Hemant Mishra/Mint

New Delhi: Stuffed animal heads adorn the walls of Kunwar Vikram Jeet Singh’s mansion on the outskirts of Delhi, and he also owns a three-bedroom apartment in a gated condominium in the city. His children go to one of India’s most exclusive private schools. Yet Singh doesn’t pay income tax because he’s a farmer.

Singh is one of thousands of rich landowners who don’t need to pay taxes thanks to laws designed to help the hundreds of millions of poor farmers who scratch a living from India’s soil. The average Indian farmer has less than 2 acres (0.8 hectares) and most struggle to eat two meals a day. Singh’s family farm has 100 acres.

Worse still, some people are buying agricultural land to avoid paying taxes by declaring their earnings as returns from farming, opposition lawmaker Sharad Yadav told Parliament in March. Citizens declared about $29 trillion worth of agricultural income in the year through March 2011. That’s almost 15 times the value of India’s economy.

The figure was the result of a Right to Information (RTI) request by a former tax officer Vijay Sharma, who says the number is probably a computation error and should be closer to 1% of GDP or $20 billion. Several requests for clarification from the government have gone unheeded, which pushed him to approach the courts. In the nine years through March 2016, Indians declared $21 billion as agricultural income, according to provisional data from the revenue department. The confusion, however, underscores the fog of uncertainty surrounding the estimates.

“It’s a simple case of money laundering,” said Sharma, who served in the tax department for over four decades.

Responding to Yadav, finance minister Arun Jaitley said authorities are investigating tax evaders that include some “prominent names” and urged the opposition not cry “political victimization” when they are prosecuted. He didn’t name names.

The lost revenue is a blight in a nation where direct taxes as a share of the economy have fallen to the lowest in almost a decade, despite Prime Minister Narendra Modi’s pledge to crack down on tax evasion.

With so little revenue, the government is having to borrow a gross Rs.6 trillion ($89 billion) to help fund the government and finance spending on roads, ports, power plants and other public projects this fiscal year. The government should start taxing large farmers to reduce that debt burden, said Parthasarathi Shome, a former finance ministry adviser.

“It is a question of equity,” said Shome, who also served as the chief of tax policy at the International Monetary Fund in the 1990s. “There are top-of-line farmers who are well protected by incentives and it is high time that we start thinking of taxing them.”

Jaitley has ruled out imposing income tax on farmers, most of whom struggle to even feed their families from their small plots. Almost 12,500 farm workers committed suicide in 2014, junior agriculture minister Mohanbhai Kundariya said in April.

And taxing rich farmers is politically dangerous. Many leaders across the political spectrum come from a farming background and have considerable land holdings.

So measures to help the 833 million people who live in villages in India also benefit landowners like Singh. He can buy fertilizer at reduced rates, a subsidy that costs the government about $10 billion a year nationally, more than it spends on healthcare or higher education. Farmers also get cheaper electricity than factories or homes. Some states, like Punjab and Tamil Nadu, offer power virtually for free.

“Most of the benefits of fertilizer subsidy and minimum support price go to farmers who have irrigation facilities and that are mostly large farmers,” said Ajay Vir Jakhar, chairman of Bharat Krishak Samaj, a farmer’s lobby group. “Even the way support price mechanism is designed, it benefits the larger farmer as they have larger surplus to sell.”

The federal government, the single biggest buyer of food crops, purchases cereals such as rice and wheat at guaranteed prices from farmers and sells grain to the poor at subsidized rates through a chain of fair-price shops across the country.

“It’s a simple case of money laundering.”

Such largesse hampers India’s fight to curb Asia’s widest budget deficit, control inflation and win faster interest rate cuts from the central bank. The combined federal and state fiscal situation is a key impediment to a rating upgrade even as Modi pledged to narrow the federal budget gap to a nine-year low of 3.5% of GDP this year.

Singh says he would pay tax if the government provided modern irrigation facilities to farmers and ensured regular supply of electricity instead of providing cheap power at odd hours when demand from industry ebbs.

“A farmer doesn’t mind paying income tax provided he gets the right amount for his produce,” said Singh, wearing Levi’s jeans and gemstone finger rings, while peacocks wandered across the lawn of his house in Hapur. The land adjoining the property, with mango orchards and sugar cane, has been farmed by his family for generations. “The only difference between me and a small farmer is that I don’t have to worry about my next meal.”

In the February budget, Jaitley promised to double farmers’ incomes and proposed a laundry-list of measures—more rural roads and irrigation, better management of groundwater, more organic farming, modern wholesale markets, increased credit and improved crop insurance.

Such measures also tend to benefit larger landowners more than poor farmers. States like Punjab and Haryana, where farms tend to be larger, get the lion’s share of handouts and boast modern irrigation systems for over 80% of cultivated land.

“The large farmers are clearly gaining,” said Shweta Saini, a consultant at the Indian Council on Research on International Economic Relations, a Delhi-based think tank. For smallholders, “whatever you are producing, you are eating.” Bloomberg

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