New Delhi: Federal policy think-tank NITI Aayog has proposed bringing agricultural income within the personal income tax net, to broaden the tax base and thereby enable the government to reduce the tax rate.
The recommendation is part of a 15-year perspective plan circulated among states at the NITI Aayog’s governing council meeting on Sunday.
It however clarified that since taxing agriculture income was politically sensitive, the think tank will finalise the draft document only after it received responses from the state governments.
Excluding income from farming, which accounts for about 15% of India’s $2.2 trillion gross domestic product, out of the tax net forces the government to keep personal income tax rate high. Besides, taxing farm income above a threshold will also prevent evasion of taxes misusing the exemption given to farm income.
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NITI Aayog vice-chairman Arvind Panagariya said at a briefing on Tuesday that the planning document recommended expansion of the tax base and simplification of the tax system through reforms.
NITI Aayog member Bibek Debroy explained that widening of the personal income tax base was examined by the think tank as corporate tax exemptions are already being weeded out and the proposed Goods and Services Tax (GST) will expand the base of indirect taxes. GST will be applicable to businesses with a turnover of Rs20 lakh or more, while manufacturers currently pay central excise duty only on turnover above Rs1.5 crore.
Debroy said that income tax should apply on agriculture income only above a threshold, which could be more or less at par with the personal income tax exemption limit, which at present is Rs2.5 lakh. The threshold for taxing farm income could be the average over a period as incomes could vary year after year, said Debroy.
NITI Aayog’s reasoning is that out of the 220 million households in the country, about two-third live in rural areas and only about half of the 7.5 crore households in urban areas come under personal income tax bracket after accounting for the Rs2.5 lakh a year exemption limit.
“So, in order to widen the tax base of personal income tax, besides removing tax exemptions, rural income including agriculture income could be taxed," said Debroy. The non-farm personal income of rural population is already being taxed.
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The proposal assumes significance also because the tax department had found suspected cases of non-farm income being shown as farm income to avoid taxes. According to the finance ministry, between 2007-08 and 2015-16, 2,746 entities and individuals declared agricultural income of above Rs1 crore, Mint had reported last March.
The vision document that will set the economic and social goals for the Union and state governments recommends a three-year action plan that warrants executive action across sectors, a seven-year strategy that requires legislative changes and a 15-year vision that warrants institutional changes including amendments to parts of the Constitution.
Ashok Gulati, agriculture chair professor at Delhi-based Indian Council for Research on International Economic Relations said that while the intention of checking misuse of tax exemption on farm income was noble, implementation may not be easy.
“The practical problem is how to compute costs of cultivation and arrive at profits or net earnings which can always be shown to in the negative," Gulati said. Although agriculture income is not taxed in India, farmers do face many types of implicit taxes. “Controls on exports and stock limits which suppress farm gate prices are actually implicit taxes on India’s peasantry," he said.
A statement from NITI Aayog said the three-year action plan proposed a medium-term spending framework and lowering fiscal deficit to 3% of GDP by 2018-19, down from 3.2% projected for the current fiscal.
To resolve the high level of bad debt among state-owned banks, the think tank recommended auction of largest of those assets to be auctioned to private asset reconstruction companies. It also suggested ending cross-subsidy in the power sector, that makes industrial power tariff costly. Setting up a coal regulator and encouraging commercial mining also were part of the action plan. It also suggested that competition should be promoted in the economy by reviewing all sectoral regulations.